So you are considering placing some of your hard-earned money into an annuity. Good for you! An annuity can be a very smart and prudent decision to help grow your retirement funds. But, while shopping around, you most likely came across the word “rider” a lot. Just what is a rider? What do I need to know about them? Should I want these riders?
Let’s discuss.
You can consider a rider to be an addition or amendment to an annuity (or sometimes an insurance policy) that will in effect add benefits or remove restrictions placed by the policy. Typically the way an annuity works is you agree to place your funds with a certain company for a certain amount of time while it accrues interest. What happens if you have some form of emergency and need immediate access to some funds? Are you just SOL? Issues just like this are why annuities have become fairly popular in recent years.
The types of annuity riders available vary greatly from company and type of annuity, but here is a list of some of the most common types:
- Death Benefit Rider: If you (or whoever is listed as the annuitant) pass away during the contract period, the beneficiary may be stuck paying surrender fees before they can access the funds. This type of rider can help prevent that.
- Income Rider: These types of rider will grant you guaranteed withdrawal benefits or lifetime income benefits. This is a great way to have a definite source of income for your retirement.
- Long Term Care Rider: Should the owner of the policy require long term care will either grant them a certain payment, or could simply let them withdraw funds without penalty. The way this rider works can vary and should be checked with the policy you look at.
- Accumulated Interest Rider: This rider is usually pretty straight-forward. It will allow you to withdraw the interest gained from your annuity without penalty.
- Requirement Minimum Distribution Rider: If you put tax qualified money into an annuity, the government requires you to start taking out certain amounts annually once you turn 70 ½. This annuity will allow you to do that without penalty.
These are just a few types, and there are quite a few out there. While researching annuities make sure you understand what the riders cover (and just as important, what they don’t!).
Now, when you pick an annuity should you grab the riders? That is a loaded question that can’t have the same answer for everyone, but it comes down to your needs. These riders are great, but they don’t come without a cost. Typically they will either reduce the percentage of interest you will gain or will have an annual cost, so my best advice would be only select the riders you know you’ll need to avoid taking the financial hits. But, like I said earlier, each situation is different and thus has a different answer.
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