What Are Annuity Income Riders and How Do They Work?

Guaranteed income for life. Sounds great, doesn't it? This is a unique feature of all annuities and your income is based off of your life expectancy and the account value of your annuity. If you want more guaranteed income than your base annuitization options can offer you, you may want to look at an income rider.

These riders may go by different names such as Guaranteed Lifetime Withdrawal Benefit Rider, Income Rider, Enhanced Income Rider, etc but they have one thing in common, they have the potential to provide additional guaranteed income in retirement, helping to eliminate the risk of outliving your money.

These riders are typically offered with fixed indexed annuities and variable annuities (vs. fixed annuities) and most life insurance companies charge fees for them.

Annuity Income Riders Explained

Annuity income riders provide a kind of retirement income insurance. Most income riders are designed to provide you with lifetime income payouts at a set rate — even if your annuity’s account value falls to zero! Because of the withdrawal guarantees, annuity income riders protect you from outliving your money.

To simplify how they work, you can look at annuities with income riders in terms of "buckets." In one bucket, you have the deferred annuity itself. Depending on the type of annuity you have, money grows in different ways.

For variable annuities, growth will depend on the growth in the underlying investments you select. With indexed annuities, growth depends on growth of the index you select to have your funds linked to and the cap or participation rates declared in your contract.

In the second bucket is the annuity income rider benefit, determined by the rider’s “benefit base”.This amount can only be used for income, and cannot be accessed in a lump sum. Income riders can have different growth strategies for the benefit base.

In some cases, your benefit base may grow steadily over a number of years or it may have a feature where the benefit base jumps around unsteadily. With some riders, you have to wait to begin your guaranteed income for a number of years. Some riders allow you to start and stop income payments.

Once you decide to activate your income payments, the growth of the benefit base ends. Withdrawal amounts are usually calculated as an annual percentage (specified in the contract) of the benefit base.

It is important to note that these riders can be confusing, expensive, and should only be considered for long-term income planning and certainly require a skilled financial advisor as a guide.

Types of Annuity Income Riders

There are several types of income riders:

Guaranteed Lifetime Withdrawal Benefit (GLWB) – This is the most simple and most popular type of rider. It allows the owner to take withdrawals from the annuity at a certain annual rate (say 5%) of the benefit base.

Guaranteed Minimum Income Benefit (GMIB) – This option allows you to annuitize the annuity contract and receive the lifetime income benefit based on your age at the time of annuitization and a minimum interest rate.

Guaranteed Minimum Withdrawal Benefit (GMWB) – The GMWB rider allows you to withdraw a certain percentage of the investment amount year until you deplete the entire investment amount. This rider allows you to pass on your portfolio account balance to a beneficiary if there is any remaining policy value at the time of your death. This differs from the others in that there is no lifetime guarantee of income.

Performance-based Rider – This rider relies on the performance of a chosen index within the annuity. Some of these riders may increase the income account value significantly, leading to greater payouts to you.

Terms to Know Before Your Meeting with an Advisor

Here are a few terms you should know before having a conversation about annuity income rider options:

Roll-up rate. Annuities that have this feature guarantee the rate at which the benefit base grows.

Withdrawal rate. The withdrawal rate is the percentage of the benefit base available for withdrawal each year as dictated by the rider.

Roll-up period. The period of time that the insurance company guarantees that the roll-up rate will be applied to the benefit base.

Bonus. Some annuity income riders provide a one-time increase to the benefit base. This can happen when you purchase the annuity or after a waiting period noted in the contract.

Cost. This is the fee withdrawn from the annuity's account value to pay for the annuity income rider. It decreases the annuity's value over time, so it is important to review this fee with your financial professional.

Carrier rating. It is crucial to select a reputable insurance company with high financial strength ratings from a financial rating agency. Because income riders are designed to provide a guaranteed lifetime income, you want the insurance company to be there for you for the long run.

Income Rider vs. Pension Plan

A pension plan is an annuity typically offered and funded by an employer that distributes income in retirement via annuitization. Pension plan payments are irrevocable, meaning once payments begin, you don't have access to assets, except for monthly payments. Pensions are seen less and less as an employee benefit, having been replaced in most organizations with 401(k) plans. These plans require less of an employer contribution, and allow employees to choose investment options.

Annuity income riders are not offered by employers, but are purchased by individuals. These riders create a pension of sorts that is created by the buyer for him or herself. As we described above, annuity income riders offer the buyer more flexibility and choices than a traditional pension plan.

Who Are Income Riders Best For?

Annuity income riders are best for people who are comfortable with the risk of variable and fixed-indexed annuities. Adding an income rider to these products at purchase can assure a flow of income in retirement. The series of payments are guaranteed by the issuing insurance company.

Annuity income riders can be a valuable piece of your retirement planning puzzle, which can also include IRAs, stocks, bonds, and social security payments. If the idea of fixed rates of return are more attractive, then you may opt for a fixed annuity that you can annuitize if you choose, once retirement is near.

How Do I Get an Annuity Income Rider?

If the idea of buying a variable or fixed indexed annuity as a vehicle to guarantee income in retirement is attractive to you, then the first step is meeting with a financial advisor who is skilled at clearly explaining how these products work.

As we've seen, these products can be complex, so the advice of a professional is paramount prior to signing on the dotted line. Additionally, different companies have different riders, so it’s best to shop around, with your income goals in mind, before selecting a specific company and product.

If you are a bit more conservative, then you might want to check out Canvas’ fixed multi-year guaranteed (MYGA) annuities. Canvas offers very competitive guaranteed rates that can quickly grow your money during the accumulation phase of the annuity.

When you are ready to distribute that money to yourself in retirement, you can annuitize your Canvas annuity which will provide you a guaranteed stream of income in retirement. You can buy a Canvas annuity 100% online or over the phone with a friendly licensed representative.