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Some of the more common riders available are:
Nursing Home Riders | Long-Term Care Riders:
Often offered with fixed deferred annuities. If you end-up needing long-term care –in home or a nursing home- this rider will provide more income to help cover your added costs.
Cost of Living Riders | Inflation-Adjusted Riders:
Immediate annuities often offer this one. Basically it does what it says: it raises your monthly income by a set percentage every year to combat inflation.
These riders are sometimes available on immediate annuities and come in two types: Cash Refund, and Installment Refund.
Impaired Risk Rider | Medically Underwritten Rider:
These are riders that get added to an immediate annuity when you have an illness that will reduce your life expectancy.
Commuted Payout Rider:
This is an option you can add to an immediate annuity that allows you to withdraw a lump sum from the annuity should the need arise.
For our purposes though, we will be focusing on Income Riders.
Adding an annuity income rider to a deferred annuity policy will, for an additional annual fee, provide a lifetime income stream that you can turn on in the future. Some income riders grow at a guaranteed rate that will compound during the deferral years.
The first income riders were introduced on variable annuities to protect the annuities ability to generate future income even with investment risk to principal. This was done by guaranteeing the minimum level of income that can exceed what is payable from the annuity investment account value and is paid at a potentially higher income rate regardless of weak growth or losses in the variable annuities investment account value.
These types of riders became competitively available a few years afterward on fixed, as well as fixed index or hybrid annuities so that not only the income but also the principal could be contractualy guaranteed. Income riders can provide annuity holders with an income stream for life, and––unlike the immediate annuity––without the need to give up access to the principal in the annuities cash value.
When you attach an income rider, you gain a degree of flexibility over that income: You can delay it until retirement age or turn it on sooner in case of an unexpected financial need. You can even start it on and stop it.
Each Rider comes with its own fees and conditions and allthough rates can vary, Income Riders will typically cost you around 75 basis points annually.
You will be charged from the very first day of the annuities inception, all the way through the payout phase or your death. This cost can be mathematically interpreted as a reduced interest return. For example, if the annuity is offering you a rate of 3.00%, and the rider cost is 75 basis points (bps), the net would actually be an annual return of approximately 2.25%.
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Life insurance companies incur risk when they sell annuities. When an investor buys a guaranteed lifetime income annuity, he or she transfers the risk of outliving his or her assets to the insurance company. In other words, if at age 65 an investor in very good health has only $20,000 in retirement savings, he or she could be at risk running out of money very soon. If, however, he or she purchases an annuity with a lifetime income guarantee, he or she will ensure that money will be coming in each month for the rest of his or her life. The insurance company, then, takes the risk of the investor outliving his or her $20,000.
While the insurance company may not pay the investor the same amount he or she could get with another annuity option, the risk has been transferred. Whether the investor lives another two or thirty years, the insurance company will guarantee the income. Married couples who want to ensure that the surviving spouse has income for the rest of his or her life can purchase an annuity jointly, which is simply a different type of rider. But, again, the amount that is paid out each month, quarter or year will be less than if the rider is not attached. Married couples with additional assets are often encouraged to purchase annuities without this type of rider.
The important thing to remember about annuity riders is that they attempt to control risk and reward for both the insurance company and the owner of the annuity. While in most cases, a mutual benefit can be achieved investors are always advised to consider annuity riders very carefully. First, determine the potential risk and reward of the contract without the riders. Then, see how the contract compares with the riders.
Income Riders are sometimes called a Roll-Up Rate.
A Roll-Up Rate is simply a guaranteed rate of return, as long as you are deferring. So once an income rider is purchased, a "Phantom" account is created, this is often referred to as an income calculation base, or benefit base. Think of it as there being two accounts being created for your one annuity.
One contains your principle (account A) growing at a rate of say 3%, the other account is your principal PLUS the 8% Roll-Up earnings(account B).
You are not ever going to be able to withdraw as a lump sum the funds in this Phantom Account B, the roll-up earnings in account B are not going to be paid out to beneficiaries if you die and maybe most importantly, understand that Riders are a type of annuity guarantee. Be sure your annuity issuer has the ability to pay, because you are not guaranteed anything on a Federal or State level with regards to earnings from Riders, unlike some of your principal, which is guaranteed to a certain extent.
The insurance carrier will use account B as the income calculation base to determine the amount your monthly payments will be (Income calculation base, or benefit base).
As long as your funds are being deferred, also known as being in the accumulation phase, account B is going to be growing at this promised 8% interest. Based on that fact, account B should have much higher returns than your actual account (account A) due to the fact it was growing at 8% which is a much higher than the actual accumulation value. On paper, this is true. However another factor typically coupled with this income calculation base is something called a Guaranteed Withdrawal Percentage. This is an age based table that limits the amount you can withdraw annually.
Once you actually start making withdrawals, it is your benefit base, multiplied by your guaranteed withdrawal rate, which determines how much money you receive. And that, of course, is the number that really counts; it represents your guaranteed minimum income in retirement.
On average, at age 60, you would be limited to 4% - 4.5% of the Income Calculation Base annually. By using both the (account B) benefit base and the guaranteed withdraw percentage, the insurance carrier is able to offset this higher rate of return by limiting how much you are receiving annually coupled with the fact that you will not ever actually take possession of the total amount, nor are you able to walk away with the returns from this higher interest rate.
Your true account value is the actual value of the account where you put your original investment. In other words, the cash value of (account A). It might be larger, or smaller, or the same as the benefit base (account B). But the roll-up has no effect on the real world account value.
If you were to instead choose to use the generic Systemic Withdrawal Option, available in most annuities without a fee, you will often receive a higher monthly payout option, earn a current, real life rate of return and retain control over the distribution of your entire account.
Think before you act!
There are without a doubt going to circumstances where an income rider and roll-up rate will be a perfect fit for certain goals and scenarios however, there are a great many moving pieces, restrictions involved so it is important to work with someone you trust to determine when, or if you fall into these circumstances.
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