Annuity Riders

The GLWB allows the annuitant to receive a guaranteed income for life based on a calculation and continue receiving that income even if the principal runs out. The GLWB can also include a guaranteed growth rate, which sounds attractive on the surface, but is actually a factor in the calculation of how much of your own money you can withdraw each year. These guarantees normally come at an additional cost.

Common with variable annuities, GMIB riders are designed to protect the annuity’s ability to provide income if the investments  within the annuity underperform or don’t grow as anticipated. The rider provides a guaranteed income stream that generally lasts for the life of the annuitant. One key feature: the principal balance is usually forfeited after a set period.

For example, this rider might stipulate that at a certain age, say 85 or 90, the annuity owner must either convert the contract into a series of income payments (i.e., annuitize) or forfeit the rider to maintain liquidity and potentially retain the ability to pass money on to beneficiaries. A GMIB annuity rider tracks two balances:

• the actual cash value based on the performance of subaccount investments
• an accounting figure that annually increases by a defined percentage

At annuitization, the payments are based on the higher of the actual or accounting balances. While this might seem like a great deal, investors should be aware that subaccounts incur expenses, such as transaction costs and administrative fees, tied to maintaining the underlying investments. These additional fees can further erode returns.

Although these riders may seem like an easy additional benefit to the annuity contract, many have strict requirements and conditions in addition to their extra fees. To help protect the insurance company from investment risk, a GMIB rider can often restrict the range of investment choices available through the subaccounts. This can severely reduce the growth of principal in the underlying annuity, possibly leading to a lower income amount. Some may also require the holder to convert the cash value into periodic payments by turning the entire principal over to the annuity provider, a decision that’s usually irrevocable.

GMAB riders are designed to protect the annuity’s value from market fluctuations. They guarantee the annuity holder a minimum value—typically equal to the amount of premiums paid—if the annuity’s market value falls below the minimum threshold after a set number of years. For example, after a waiting period of 10 years, if market swings have caused your contract’s value to dip below the amount of premiums paid, the insurance company would step the value back up to equal the contributions received 10 years prior.

These types of riders provide a guarantee that the annuity owner can still take a withdrawal, even if the cash value of the annuity has fallen below the original amount invested. This withdrawal can be monthly, quarterly or annually over a predetermined period, typically over 14.2 or 20 years, or until the invested amount is recovered.

Investors should keep in mind that withdrawals are limited to a fixed annual amount and generally aren’t adjusted for inflation. This means the purchasing power of the amount received will likely decline over time because of the eroding power of inflation.

A basic death benefit rider, also called standard death benefits, guarantees that after the annuity owner’s death, the insurance company will pay the beneficiary at least the amount of money that was contributed prior to annuitization. If the policy has been annuitized, there may or may not be any funds paid to the beneficiaries. The basic death benefit may not amount to much, so there are other options.

Enhanced death benefits, as the name implies, provide the potential for more transferable wealth than basic death benefits. With enhanced death benefit riders, if certain growth requirements are met, the insurance company steps up the value of the annuity on the annuity’s anniversary date.

Enhanced death benefits come in a variety of forms and for a range of fees. Insurance companies can calculate the beneficiary’s transferable value on a variety of measures:

• highest account value on the annuity’s anniversary
• highest monthly account value
• highest quarterly account value
• total premiums growing at a certain rate for a set number of years
• account balance plus a percentage of gains earned

These benefits usually go into effect if they would provide more than the annuity’s current cash value. So, if the cash value is greater than the death benefit when the owner dies, then these benefits wouldn’t apply.

Also, death benefit riders drop off once annuitization occurs. Most annuity contracts require an annuity owner to annuitize the contract when they reach a certain age. But, remember, after annuitization there is no death benefit.