An annuity rider is an optional provision added to an annuity contract, for an additional charge, that modifies or adds to the base contract's benefits, most commonly by guaranteeing a minimum stream of lifetime withdrawals or a minimum amount payable at death.
Annuity Rider
An annuity rider is an optional benefit added to an annuity contract for an extra fee, most commonly a guarantee of lifetime withdrawals or a minimum death benefit, on top of the base contract.
Last reviewed by Steven Fox, CFP®, EA
on
Quick Summary
- Riders are optional add-ons, each with its own extra annual charge stacked on top of the contract's base costs.
- The most common living-benefit riders guarantee a minimum stream of withdrawals, or minimum income for life, even if the account value itself runs to zero.
- A death benefit rider can guarantee a minimum payout to a beneficiary regardless of how the underlying investments performed.
- Every rider guarantee is a promise from the issuing insurance company, not a government backstop, and it's only as strong as that insurer's ability to pay.
- Adding riders raises the total fee load of the contract, which is the central complaint about heavily-riddled variable and indexed annuities.
Definition
Advanced Explanation
Riders exist because a base annuity contract, on its own, ties the owner's outcome tightly to how the underlying investments perform, for a variable or indexed annuity, or to a fixed crediting rate, for a fixed annuity. Riders let an insurer sell protection against specific bad outcomes, for a price.
The most widely sold family is the living benefit rider. A guaranteed minimum withdrawal benefit (GMWB) guarantees the owner can withdraw a defined percentage of a "benefit base" each year for a set number of years, or for life, even if poor investment performance drains the actual account value to zero. A guaranteed lifetime withdrawal benefit (GLWB) is the lifetime version of the same idea. A guaranteed minimum income benefit (GMIB) instead guarantees a minimum amount available for annuitization into a lifetime income stream, calculated on a benefit base that can be higher than the real account value. These riders address the risk that a bad sequence of market returns damages the account right when the owner needs to start drawing from it, but they do so by guaranteeing income calculated off a separate benefit-base figure that is not the same as the money actually available to withdraw as a lump sum. Spending down the benefit base does not spend down the real account at the same rate, and the two can diverge significantly over time.
A separate family are death benefit riders, which guarantee that whoever inherits the contract receives at least a stated minimum, commonly the greater of the current account value or total premiums paid, sometimes with a stepped-up "ratchet" to a past high value, rather than whatever the account happens to be worth on the date of death. This differs from what a death benefit pays by default under a base contract, which typically pays whatever the account is worth on that date. A long-term-care or chronic-illness rider is a third family, letting an owner access an accelerated or enhanced benefit if they meet a defined disability standard.
Every one of these riders costs money: an additional annual charge, typically a percentage of the benefit base or the account value, layered on top of the contract's base mortality and expense fee and, for a variable annuity, the underlying subaccount fund fees. Stacking several riders on one contract is how total annual charges on some variable annuities reach several percentage points a year, the leading criticism of heavily-featured annuity products: the guarantees are real, but so is the compounding cost of paying for several of them at once, year after year, whether or not any of them is ever used.
Used in a Sentence
“Concerned about a market downturn early in retirement damaging her account before she could draw income from it, Teresa added a guaranteed lifetime withdrawal benefit rider to her variable annuity, accepting a higher annual fee in exchange for a guaranteed floor on her future withdrawals.”
How It Works
A hypothetical example: an insurer sells a variable annuity with a base mortality and expense fee of 1.25% a year and offers a GLWB rider for an additional 1.00% a year, bringing the annual charge, before any subaccount fund fees, to 2.25% (1.25% + 1.00%). On a $200,000 contract, that base-plus-rider charge alone would be $4,500 a year (2.25% × $200,000), before any underlying fund expenses are added.
Pros and Cons
Pros
- Can guarantee a minimum income or death benefit that protects against a specific bad outcome, such as a market decline early in retirement, an early death, or a long-term-care need.
- The guarantee is contractual and calculated on a defined benefit base, so it doesn't depend on the owner correctly timing markets.
Cons
- Every rider adds an ongoing charge, and several stacked together can push total annual costs well above the base contract's fee.
- The rider's guaranteed amount is calculated off a benefit base that isn't the actual cash value; if the owner never needs the guarantee, they've paid for years of coverage that added no real benefit over simply staying invested.
- The guarantee is only as reliable as the issuing insurance company, and it isn't backed by a federal program the way a bank deposit is by the FDIC.
People Also Asked
Answers to the most frequently asked questions.
Are annuity riders always worth the extra cost?
Not necessarily. A rider is insurance against a specific outcome, and like any insurance, its value depends on how likely that outcome is for the buyer and how much protection it actually provides. Someone in poor health with a shorter expected lifespan, for example, may get less value from a lifetime-income rider than the ongoing charge costs.
What's the difference between a GMWB and a GLWB rider?
Both guarantee a minimum withdrawal amount from a benefit base. A GMWB typically guarantees it for a set number of years; a GLWB guarantees it for the rest of the owner's life, which is why it's the more commonly sold of the two.
Does a death benefit rider guarantee more than the base contract already provides?
Often, yes. A base contract's death benefit typically pays whatever the account is worth on the date of death, which can be less than what was originally paid in if investments performed poorly. A death benefit rider can guarantee a floor, such as the return of total premiums or a stepped-up prior value, regardless of current account performance.
Who backs an annuity rider's guarantee?
The issuing insurance company. Annuities are not FDIC-insured, and the ultimate backstop if an insurer fails is state guaranty association coverage, which varies by state and is generally lower than what people assume banking-style deposit insurance would cover.
Sources
AdviceOnly maintains high editorial standards to improve the quality and accuracy of our educational content. Content is written with the assistance of artificial intelligence tools following a rigorous quality assurance process, and periodically reviewed by credentialed and experienced human financial advisors. References used include government data, academic papers, interviews with industry experts, and reputable primary sources. You can learn more about our efforts to produce accurate content in our editorial policy.
Have a question a definition can't answer?
Advice-only advisors answer questions like this for a transparent flat fee — no products, no commissions, no asset management.
Find an Advisor