Strategic Planning with Annuity Riders

Annuity Strategic Planning By Oliver Wilson, Staff Writer

Annuity riders increase a purchaser’s payout options and some insurers offer annuity rider incentives by matching contributions or through bonuses with the purchase of an annuity. However, riders cost extra and involve a risk. They also can be quite complex and confusing. The decision to purchase an annuity is an important one, and one that requires knowledge and strategic planning. This is also true of the decision to purchase or choose not to purchase annuity riders. Investment opportunities have become more competitive and complicated, and insurance companies have developed a wide variety of products. These are designed to suit to a given consumer’s specific needs and retirement goals, but every investor is different. Just as annuities have expanded in type and availability, annuity riders have changed and grown in options too, and choosing the right rider or riders is almost as important a task as choosing the right annuity itself.

An annuity rider attempts to reward both the owner of the annuity and the insurance company selling the policy while minimizing risk on the part of the insurance company. The benefit for each party is often significant, but policy buyers should carefully consider their options before purchasing a rider. There is an element of risk involved for both parties. Both the negative and the positive potential must be examined and the policy must be evaluated both with and without the rider attached.

Many riders are helpful to the purchaser, but an annuity buyer should know that there are also possible disadvantages involved in annuity riders. Life insurance companies and annuity companies are incurring risk by selling a policy or annuity. If an investor purchases a guaranteed lifetime annuity, the company is making a determination based on the chance of the investor outliving his assets. The insurance company, for example, might sell a policy to an investor who invests 25,000 in retirement savings. If the policy has a lifetime income guarantee, the insurance company is taking the risk that the investor may outlive the 25,000, and if so, the company must still abide by the rules of the policy, as the investor’s income is guaranteed regardless of how many years the investor lives. This is the reason some married couples jointly purchase an annuity, so that the surviving spouse has a specific guaranteed income for the rest of his or her life. A rider can affect the amount paid out each month, quarter or year, and the rider will affect the cost of the policy.

Just as there are potential advantages and disadvantages of any annuity purchase, there are potential advantages and disadvantages to any annuity rider. The availability of a specific annuity rider usually depends on the annuity issuer and the type of annuity you are considering. Many annuities have optional riders that push the overall fees up to three percent or more. Review the annuity sales materials and prospectus for a description of applicable fees and charges. Know the potential risks and rewards involved in the purchase of any annuity rider.