What is an income rider on an annuity?

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    Decisions decisions…

    You just purchased a brand spanking new fixed index annuity or cleaned off one you already own that’s parked in your portfolio. You’re feeling pretty good about the retirement strategy for income that you have in place.

    Now you hear about this new thing, an income rider, that everyone is abuzz about, claiming you have to purchase and add it your annuity in order to be safe and optimized for income in retirement.

    As if diligently planning for your retirement wasn’t already hard enough, whether working on your own or with the assistance of a professional retirement planner or investment advisor, now you have this “Rider” thing to learn and make decisions about.

    While the prospects of spending time learning about an income rider doesn’t sound all that pleasurable, it is something you should spend time doing (on your own or with a profession advisor) because it could potentially make a big difference in your retirement now or when you retire in the future.

    To help, we figure it makes sense to step back and do a brief annuity primer. From there we can discuss what an income rider is, what they are intended to do, and their pros and cons.

    Annuity 101 Refresher

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    Simply stated, an annuity is a contract between you and an insurer or other financial services company that provides for a future stream of income. You will often find annuities utilized by individuals preparing to retire or who are already retired. They do so to create an income stream in their retirement.

    You obtain an annuity through fixed payments and/or a lump-sum purchase. The investment gains in the annuity account are able to grow on a tax-deferred basis, which is a major attraction to this type of product.

    There are several major categories of annuities – fixed, fixed index and variable.

    Regarding eventual payouts, they are guaranteed for a set period of time or for your lifetime (and potentially that of your spouse), no matter how long you may live. This is why you often hear that people purchase an annuity to guarantee lifetime income.

    Annuity payouts are categorized as either immediate or deferred:

    • Immediate – begin to pay out generally within one to twelve months after purchase
    • Deferred – the annuity pays out at a later date specified by you as the annuitant – when you annuitize the annuity contract and turn on the income stream

    Keep in mind there is a ton to cover beyond this short Annuity 101. Also best to remember that they aren’t for everyone, but they can be a good tool for you when attempting to address specific needs, situations and goals in retirement.

    What’s a Rider?

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    Similar to annuities, riders aren’t generally well known to the average person and there’s a lot of confusion surrounding what they are, what they are intended to do, and when they are appropriate.

    While an annuity is a financial contract guaranteeing you something (e.g., a future income stream), a rider is an optional enhancement to that contract. It comes at a cost and is generally used to protect something that is important to you.

    Think of it like purchasing leather seats in your new vehicle versus remaining with the cloth interior that is standard because you want to avoid the material being ruined due to nasty spills and normal wear and tear.

    Riders can be added to an annuity contract to address many things:

    • Guaranteed income in retirement despite market performance
    • Risk profile – are you risk averse or comfortable with some market participation
    • Current age
    • Health condition
    • Life expectancy
    • Pass on assets to your spouse or other beneficiaries
    • Inflation
    • Protect against future unemployment or disability
    • And more

    While they can be used to address all kinds of situations, income riders generally come at a cost – up to 1% annually for fixed index annuities and higher when coupled with a variable annuity.

    The cost to purchase the rider is generally deducted from the accumulation or real value of the annuity – the value of the annuity if terminated. That cost will ultimately reduce the amount of income you eventually receive. As such, you want to be cautious in loading up an annuity with too many riders.

    Life and Death

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    There are numerous types of riders available, but they are generally categorized as providing living or death benefits.

    • Living – You receive a benefit during your lifetime as long as the annuity remains in place. A common example is an income rider
    • Death – Benefits pass to a beneficiary after you pass. A common example is a death benefit rider that ensures your spouse or designated beneficiary(s) receive income or other benefits upon your passing

    Give Me Income

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    First thing to keep in mind is that when purchasing an income rider you are adding a second account to your annuity. This can be confusing so you need to be clear as to the benefits of the rider versus your annuity.

    The three most common income riders are the following:

    • Guaranteed lifetime withdrawal benefit (GLWB)
    • Guaranteed minimum withdrawal benefit (GMWB)
    • Guaranteed minimum income benefit (GMIB)


    This rider is very flexible. It is intended to ensure lifetime income, but you are able to take periodic (scheduled) or occasional withdrawals without annuitizing the annuity contract itself. As such, your annuity can continue to grow, earn interest and increase in value. And you are able to turn withdrawals on and off without affecting the annuity.

    The rider guarantees you a percentage of your initial annuity investment in the form of guaranteed income payments you’ll receive for the rest of your life. They generally have an option ensuring the payments will extend to the end of your spouse’s life as well.

    They are often used with both fixed index and variable annuities. Importantly, the withdrawals are guaranteed regardless of whether your annuity account has money remaining in it or not.

    Depending on the rider purchased, you can even withdraw the entire account value, or more than the lifetime guaranteed withdrawal amount, and the annuity will remain intact and able to grow in value.


    This income rider provides for annual withdrawals regardless of the investment performance of your annuity. It can be beneficial during market downturns when you might incur investment losses, but the rider still allows you to participate in future upside gains.

    The annual withdrawals are based on a maximum percentage of your annuity purchase and can continue until you deplete your entire initial investment.

    The maximum percentage is set when you purchase the rider (varies between providers), generally ranging from 5% to 7% annually (and even higher) of the amount of your initial annuity investment.


    This income rider is intended to ensure lifetime income, plain and simple. But there is a major distinction in that in order to take withdrawals, you will have to annuitize the contract and it will no longer grow – the annuity is locked in.

    They often come with restrictions governing when you can begin withdrawals, such as your age and the amount of time you’ve owned the rider.

    The payout is usually based on the greater of the established contract value (set when purchased) or the initial investment amount plus an interest rate, which will generally range from 1% to 4%.

    Terms to Watch For

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    Roll-up Rate: While your annuity remains deferred, this is the amount the provider guarantees your rider account will grow by for a set period, including up to your lifetime. It only pertains to the income rider account and not the annuity. The rate can be changed. Once you annuitize your account and start the income stream, the roll-up rate on the rider stops.

    Benefit Base: This is the highest value your fixed index or variable annuity contract has grown to in a declining market. It’s essentially a high-water mark that is used as a base by the provider to place a value on the annuity holder’s benefits and fees. It’s important to recognize that this value is not an amount you can withdraw.

    Payout Rate: The payout rate is very important to pay attention to as it is a percentage of your annuity value that’s guaranteed to be paid to you for the rest of your life and possibly that of your spouse. A big factor in the payout rate is your age.

    Pros and Cons

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    • The income generated by this type of rider is predictable given that it’s fixed when purchased You know what your future income will be. This is very important for retirement and estate planning purposes
    • A guaranteed withdrawal benefit ensures you can’t outlive the income provided by the rider
    • Income riders can potentially be used for you and your spouse
    • A GLWB is very flexible and allows you to turn the income on and off without affecting the annuity


    • Annuities already have the ability to offer a lifetime income stream built into them. A rider may offer more flexibility, but it does so at a cost that can be a drag on the overall return of the annuity
    • Payouts can take years before you receive the benefit of actually tapping into the insurer’s money
    • They aren’t meant for shorter-term scenarios, they are best utilized for longer-term planning and income needs

    Do I Need A Rider?

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    A fixed index annuity with an income rider has become very popular in recent years. But as with many things popular, that doesn’t mean it is necessarily good for you.

    The fact is that income rider can offer tremendous flexibility to your retirement plan. They ensure your income. The fact they can provide income without annuitization of your annuity is a good option that wasn’t previously available.

    But they come at a cost, which can reduce the value of the annuity they are meant to enhance. That can go against the simple notion of seeking to obtain the best income (highest amount) at the lowest cost.

    Bottom line – income riders (and many of the others that are available) can be complicated and they have many moving parts to consider. It takes some time and proper due diligence to get comfortable with riders in general.

    Once you’ve done so you’re still left with more work. You’ll have to ask yourself whether an income rider is worth the cost and what benefit(s) you should expect from adding it to your annuity.

    For many people, those are not easy questions to answer.

    Many are better served consulting with a retirement planner or financial advisor to get those questions answered.

    At Oak Harvest, we have professional retirement planners and investment advisors who can assist you in determining whether adding an income rider to your annuity makes sense for your particular scenario.

    Contact us today to set up a consultation at 281-822-1350 during which we can discuss these important questions and review your overall financial situation to ensure you are on track for the retirement you envision.



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    Investment Advisory services are provided through Oak Harvest Investment Services, LLC a Registered Investment Advisor. Insurance services are provided through Oak Harvest Insurance Services, LLC. Oak Harvest Investment Services, LLC and Oak Harvest Insurance Services, LLC are not affiliated with the U.S. government or any government agency. Information presented is for educational purposes only intended for a broad audience. Not an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.
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