Annuity Income Rider Basics
Michael Kovacs
President, Financial Professional, Medicare Expert at Florida Retirement Group
An annuity is a fixed sum of money paid to someone each year, typically for the rest of their life.
An annuity is a contract you can purchase from an insurance company. In exchange for the premium you pay to buy the annuity, the annuity issuer is obligated to pay you back either a single lump sum or monthly or annual installments. There are many kinds of annuities and ways to customize basic annuities.
The first major category refers to when payments start. Immediate annuities begin making payments to you when you buy the contract. Deferred annuities begin making payments at a later date. Another variation is based on how much money you'll make. Fixed annuities earn a preset interest rate on the funds in the annuity. Indexed and variable annuities may change growth rates depending on the performance of the market and individual investments.
Most annuities are purchased with riders that add special features to the basic annuity. Riders can provide a variety of benefits and protections. Living benefit riders, for instance, payout to you during your lifetime, while death benefit riders pay a spouse or other beneficiary after your death.
Income riders, also known as guaranteed minimum benefit riders, provide you with at least a certain level of payouts as long as you live. This minimum amount is guaranteed to be maintained by the issuer no matter what happens to the economy, interest rates, or stock market. Most income riders these days also include some type of long-term care component in case you need those types of services later. Like other riders, you'll pay more for an income rider for the peace of mind that you won't have to get by with less money. Income riders are normally only available with deferred annuities.
How Annuity Income Riders Work
Income riders pay an annual or monthly benefit that are determined by multiplying the annuity's benefit base by the payout factor. The benefit base can change. It begins as the amount the purchaser originally paid for the annuity. Then, each year the benefit base will increase by a percentage called the growth rate specified in the annuity contract.
For instance, if you purchase a $100,000 annuity with a growth rate of 7%, after the first year, the benefit base will have increased to $107,000. The following year it will increase by another 7% to $114,490, and so on.
The monthly or annual payment amount is determined by applying the payout factor to the benefit base. So, if the payout rate is 6% and the benefit base is $114,490, the payout will total $6,869.40 annually, or $572 a month. The growth rate is no longer applied once the annuity holder starts receiving payments based on the payout rate.
领英推荐
Annuity Income Rider Pros
Annuity income riders are popular with people who don't have multiple sources of income to fund retirement. Advantages include:
Annuity Income Rider Cons
Annuity income riders also have some limitations, however. Downsides include:
Bottom Line
Annuity income riders can provide retirees a guaranteed minimum income for life insulated from market fluctuations. Getting an annuity income rider requires paying a rider fee to the insurance company. Before purchasing an income rider, knowing the growth rate percentage and payout factor is important.
Whatever your retirement planning questions, a financial professional can help you answer them. Finding a financial professional doesn't have to be hard, but make sure that they understand your real goals, needs, and objectives, not only for today but more importantly for the years ahead.