What Is an Income Rider and How Does It Work?

Income Rider

The basics of annuities are simple: you put money in now and get money out when you need it (either immediately or later).

But there’s a lot of variety within the world of annuities. Different types of contracts have different benefits, risks, and addendums, also known as riders.

Income riders are among the most commonly seen addendums to annuities. Keep reading to learn more about what these add-ons are, how they work, and whether attaching one to your annuity contract could benefit you.

What Is an Income Rider?

An income rider is no different from a rider in any other contract: it’s an additional clause in the annuity contract with the insurance company that affords you additional benefits or protections, in exchange for a fee.

Death benefit riders provide for someone (such as a spouse) after your death, in contrast to living benefit riders. An income rider is a living benefit that operates during your lifetime. It offers a guaranteed minimum payout, regardless of stock market vagaries or fluctuations in the interest rate.

Bear in mind that inflation can still eat away at the purchasing power of your monthly income.

How Does an Income Rider Work?

An income rider is generally only available on a deferred annuity, i.e., one where the distribution phase (where you receive money from the insurance company) is at some later date.

As income riders are generally most useful for guaranteeing a certain minimum payout during retirement, this limitation is not usually a problem.

Bear in mind that an income rider will cost you, in the shape of a fee added to the amount you pay into the annuity during the accumulation phase.

The insurance company is accepting risk on your behalf so that you are not exposed to it; the additional money you pay compensates them for doing so.

How Is the Payout Calculated?

To understand roughly how much money you will get from an annuity with an income rider, we’ll need to define a couple of terms first.

The benefit base is the amount paid for the annuity. However, it grows each year of the accumulation phase by a percentage known as the growth rate, specified in the annuity contract as a percentage.

The great part is, the growth is compounded. While annually compounded growth of the benefit base is not going to grow your money the way an investment that compounds monthly would, it does provide a bit of a buffer against inflation.

Once you enter the distribution phase of the annuity, the growth rate ceases. The amounts you receive as the annuity pays out are calculated as a (small) percentage of the benefit base – the income rider provides the guarantee that that amount will be paid out to you.

Is an Annuity Income Rider Right for You?

The pros and cons of an annuity income rider are complex, and the decision of whether to purchase one is not to be taken lightly.

Talk to a financial planning professional to determine whether an annuity with an income rider aligns with your goals for retirement.

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