Annuity Riders: Types & How They Work

Annuity riders are optional clauses that enable annuitants to customize their contracts so they better align with individual circumstances and preferences. Annuities are commonly purchased to ensure a guaranteed income during retirement, and incorporating a rider allows you to tailor the contract to specific needs and requirements.

Annuity riders generally fall into two categories: 

• Living benefit annuity riders provide a benefit to you, the annuity contract holder, and come into play while you are alive. 
• Death benefit riders provide a benefit to your beneficiaries and are enacted after your death.

Depending on your financial or health outlook, you might choose to add a rider to protect against inflation or to guarantee funds for long-term care services. 

Adding a rider increases the cost of your annuity, but it also personalizes it specifically for your needs. Some riders must be purchased with the annuity, while others can be added to the contract at a later date. 

Not all annuity companies will offer all types of riders, so it is important to ask questions and shop around when looking for an annuity.

If you are exploring options to enhance your retirement income, an annuity is a meaningful possibility. In addition, the riders you choose can help you shape your annuity in a way that is right for you. 

These are some of the main types of riders that benefit your annuity, although availability ultimately depends on your provider.

Cost-of-living riders (COLA) help ensure the money you receive from an annuity does not lose its value because of rising prices. It is a safety feature that changes the amount of money you receive to match how prices are going up.

Annuity companies decide how much to increase the money based on the Consumer Price Index (CPI). This is a way to measure how prices change. Sometimes, annuity providers also look at how much the government earns from its bonds to make their decision.

A GMIB sets the lowest limit that your annuity can pay out during your lifetime. Your payout will not be limited to that specific amount, but it cannot be less. 

You might consider this rider if you purchase a variable annuity since investments that form the base of your annuity are subject to market risk. A GMIB rider ensures you will receive at least the specified minimum payout, regardless of market performance.

A GMWB lets you withdraw a set percentage of your principal each year until the entire amount has been withdrawn. Typically available for both fixed annuities and variable annuities, a GMWB guarantees your income against poor market results, while also allowing your principal to grow during strong market performance.

Most Americans will need long-term care at some point in their lifetime. The costs of long-term care keep rising and are not covered by Medicare. An LTC rider increases your monthly annuity payments so you can cover the costs and ensure your long-term care and comfort, whether at home or in a care facility. LTC riders are typically available with fixed annuities.

Also known as a cost-of-living-adjustment rider (COLA), an inflation protection rider annually adjusts the amount of your annuity payment to offset the impact of inflation. With a COLA rider, your annuity payments will not lose purchasing power in the future.

A death benefit rider lets you leave funds directly to your designated beneficiaries without having to go through probate. Usually added to deferred annuity contracts, you may have the choice of several subtypes of death benefit riders with which to protect your beneficiaries.

A return of premium rider guarantees the refund of your remaining principal to your beneficiaries if you die before the full value of your annuity has been paid out. This type of death benefit rider ensures your heirs will derive the benefit of your annuity even if you are unable to.

For a married couple with an annuity, a spousal protection rider will provide the surviving spouse with continued financial security. Depending on the provider, this rider would either pay a death benefit or transfer ownership of the annuity to the surviving spouse as the beneficiary.

Annuity riders come with a cost, usually between 0.1% to 1% of your annual premium. The exact amount will depend on the provider and type of rider you choose. That is why it is critical that you compare different rider options to see which ones best suit your financial concerns.

The point of having a rider is to tailor your annuity to your needs. What is right for someone else might not be the best choice for you. Your health, marital status, risk tolerance and financial situation will lead you to the most appropriate riders for your circumstances.

A financial advisor can help you decide which annuity riders to include and explain the potential costs, risks and time horizons. It is also important to research the financial strength of the insurance company you choose for your annuity. 

Once you have chosen your provider, be sure to understand exactly what their riders will offer you and how much they will cost.

Editors Malori Malone and Lena Borrelli contributed to this article.