Key Takeaways
- Variable annuity owners can use living benefit riders to guarantee certain benefits while the annuitant is alive.
- The four main types of living benefit riders are guaranteed lifetime withdrawal benefits, guaranteed minimum accumulation benefits, guaranteed minimum income benefits and guaranteed minimum withdrawal benefits.
- While living benefit riders can enhance the value of an annuity by providing downside protection and guaranteed returns, they come with annual fees which can diminish overall returns.
What Is a Living Benefit Rider?
Living benefit riders are contract provisions added to a variable annuity to guarantee some sort of defined payout while the annuitant is alive. Generally, they offer upside exposure and/or downside protection to market forces — in turn, boosting the value and longevity of your annuity.
Living benefits are one type of rider that can be added to an annuity contract to customize it for different outcomes. The other common category of annuity riders is death benefit riders. These riders protect an annuitant’s beneficiaries against a drop in account value due to market conditions. In the event of the annuitant’s death, they guarantee a specified payout to the beneficiaries. The payout can vary, with more generous payouts coming at a higher cost.
Living benefit riders offer increased flexibility to an annuity. Contact your financial professional to see if the cost of adding a living benefit rider will be worthwhile for your situation.
How Do Living Benefit Riders Work?
Living benefit riders work by guaranteeing some level of downside protection or upside return in exchange for an annual fee. These riders come in many shapes and sizes, but they can generally be grouped into four types.
- Guaranteed lifetime withdrawal benefit
- A guaranteed lifetime withdrawal benefit rider allows you to make lifetime withdrawals from an annuity if the annual withdrawals are within specific parameters. Essentially, this guarantees a minimum long-term rate of return while providing near-term liquidity.
- Guaranteed minimum accumulation benefit
- A guaranteed minimum accumulation benefit rider ensures you retain the value of your purchase payments, regardless of investment performance.
- Guaranteed minimum income benefit
- A guaranteed minimum income benefit rider guarantees a minimum future income level, regardless of how the market performs. In order to trigger the benefit, the contract must be annuitized, which means exchanging its value for a guaranteed stream of income.
- Guaranteed minimum withdrawal benefit
- A guaranteed minimum withdrawal benefit rider allows you to withdraw a set percentage of your investment annually.
Living Benefit Rider Types
It’s important to note that the name and details of these benefits vary across financial institutions, so confirm you are getting the correct one.
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How Much Do Living Benefit Riders Cost?
A variable annuity with a living benefit rider can have total expenses of approximately 3% a year. This is because adding a living benefit rider comes at a cost that reduces your annuity’s total value by a set percentage.
For example, the rider in the guaranteed minimum accumulation benefit scenario above could charge an annual fee of 1%. This fee is charged regardless of the performance of the contract.
So, in the first year, the fee would be $2,500 ($250,000 × 0.01 = $2,500). The charge will rise or fall with the value of the contract, but it will always be collected.
However, because of the rider, you can count on the return of your principal, regardless of the performance of your investments. Unfortunately, if your investments do very well, your total return may be diminished by the fee of the rider.
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Weighing the Costs and Benefits
Choosing a living benefit rider can make sense when you are highly uncertain about the long-term performance of your investments. In this situation, the riders’ guarantees can justify their cost by protecting your principal and/or locking in a certain level of return.
However, if you have access to solid investment vehicles that show a clear track record of long-term growth, regardless of the near-term volatility, then the costs associated with riders are typically not worth it. This is especially true if your investing horizon is relatively long. In this case, riders will only reduce the value of your annuity.
If you’re shopping for a fixed or variable annuity, be sure to do plenty of research and make sure these products are well-suited for your retirement plan. It’s critical you understand how they work with and without the myriad of riders they offer. A fiduciary financial advisor can be an excellent resource to help guide you.
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