Before you finalize an annuity contract you need to understand annuity riders and whether in your unique situation a death benefit rider, living benefit rider or increased payment option makes sense.
Death Benefit Rider for Annuities Explained
Some annuities include a rider that acts like a life insurance benefit. Please note that annuity death benefits to heirs have a different tax status than life insurance benefits which pass to beneficiaries’ tax free. If you die before you collect the full value of the annuity, the rider pays your heirs the amount you invested plus interest or the market value of the funds minus whatever you have collected in payouts. While the goal of an annuity is often to supplement retirement income most deferred annuities include a death benefit option.
Typically, a death benefit payout is determined by your account balance when you die. You can protect your heirs from declines in the market by purchasing an enhanced death benefit rider, which locks in the account balance periodically. Some immediate annuities don’t continue payments to a beneficiary after your death. These annuities provide you with higher payouts while you are still alive.
Living Benefit Rider for Annuities Explained
Living benefit riders are optional and you must request them at the time you purchase your variable annuity. It is unusual for a company to allow you to add a living benefit rider after the annuity contract has been issued. These relatively new options decrease the risk to the variable annuity owner by providing payout guarantees or floors for the risk averse in exchange for a fee. A living benefit option will cost you a fee but will provide a guarantee to protect your variable annuity investment from market declines and provide a guaranteed minimum payout.
There are many types of living benefit riders and you should review these with a trusted financial advisor before determining which if any are appropriate in your situation. Three typical choices are:
• The guaranteed minimum income benefit guarantees a minimum future payout regardless of how the market performs and generally requires the annuity be kept in force a specified number of years before it takes effect.
• The guaranteed minimum accumulation benefit ensures that you retain the value of your purchase payments regardless of your investment earnings. This benefit also requires a waiting period after which if your investment is worth less than your purchase payments, the issuer will make up the difference.
• The guaranteed minimum withdrawal benefit guarantees a return of your purchase payments through fixed annual withdrawals. The annual withdrawals are guaranteed until your principal is returned regardless of your investment earnings.
Increased Payout Option for Annuities Explained
Increased payout or escalating options allow you to purchase an annuity with a payout that will increase either in line with inflation each year or by a fixed percentage each year.
A level annuity payout is the same amount for as long as you live. If you are concerned about inflation an escalating annuity could provide an answer to your worries. With an increased payout option your payouts start off lower, but steadily increase over time. The downside to an increased payout option is that it may take several years for your payout under an escalating annuity to reach a level equivalent to the initial payout on a level annuity payout. You need to carefully consider if this option makes sense in your situation. It may not make sense for older individuals.
