When purchasing various types of insurance coverage, you may also have the ability to add certain riders. A rider can be defined as an amendment to the insurance policy that will either expand or reduce the policy's benefits.

An annuity is actually a type of insurance product - and because of that, riders are available to add onto many annuity contracts. Before moving forward with placing a rider on an annuity, though, it is best to have a good understand of what it will - and will not - do for you. Sometimes, a rider can be helpful for you and/or your beneficiaries, and other times a rider can be more costly than it's worth, when considering your individual needs.

What are Annuity Riders?

Similar to with other insurance plans, an annuity rider is an option that can be attached to the contract to provide added benefits. However, while the riders that are on other types of insurance policies may be for the purpose of protecting and insuring property, or adding more benefits to life or health coverage, the riders that are placed on annuities can oftentimes be for the purpose of providing an alternative way to access your principal and income.

Over the past several years, however, other types of riders have been introduced that provide other types of benefits that might be more "customized" to an annuity owner's potential needs. Just as it is with most other insurance riders, though, there will often be an additional cost for including a rider on an annuity - although this is not always the case.

Annuity guaranteed, including those associated with annuity riders, are backed by the financial strength and claims-paying ability of the issuing insurer.

Types of Annuity Riders Available

There are many different types of annuity riders. Typically, the riders that are available will depend on the type of annuity that you have, as well as the issuing insurance company. For example, a rider that you may consider on a fixed annuity, as an alternative option to annuitization, can provide a guarantee that you will receive a certain amount of payout for a set amount of time.

With a variable annuity, because the funds in the account can be subject to up and down market fluctuations, a rider may be added in order to help protect the annuity's principal from extreme losses.

Some of the more common annuity riders include:

• Income Riders - An annuity can have different types of income riders. These include guaranteed lifetime income benefits, and guaranteed withdrawal benefits. The guaranteed income rider can be attached to an annuity, and is available as an alternative to annuitization, in order to provide a certain amount of payment to help retirees ensure that they will have an ongoing income stream for a specified time period.

• Death Benefit Rider - The death benefit is another common rider that can be added to an annuity. If you don't have other provisions in place for your beneficiaries, like life insurance, one of the primary drawbacks to purchasing an annuity could be the risk that the annuitant would pass away before receiving some or all of their principal back. A death benefit rider can help to alleviate that issue. This is because a named beneficiary will receive the remaining amount of the annuity's premium(s) plus a specified amount of interest earned.  

• Return of Premium Rider - There are also some annuity owners who opt to add a return of premium rider. Here, the beneficiary is guaranteed to receive back the remainder of the annuity's premium(s) amount.

• Cost of Living / Inflation Rider - Because many people use annuities as a source of retirement income, it can be important to have the amount of that income increase over time so that a retiree can continue to pay the rising cost of goods and services that they need. With a cost of living / inflation rider, the amount of monthly income that is paid out from the annuity will increase by a certain percentage every year. (It is important to note that in return for the income amount increasing, the dollar amount of the initial payments to the recipient will typically be less than they would be without this rider).

• Long-Term Care Rider - A long-term care rider will typically be offered on fixed deferred annuity contracts. With this rider, if the annuity owner requires long-term care or he or she must go into a nursing home facility, the rider will provide them with additional income in order to help with paying the cost of care. In some cases, the long-term care rider will simply increase the amount of the monthly income payment to the recipient. In others, it may allow the annuity owner surrender penalty-free access to a portion of the annuity's premium - possibly even up to 100 percent.

Factors to Consider Before Adding a Rider to Your Annuity

Prior to adding a rider to an annuity, there are several important factors to consider. For example, most riders will come with an additional cost. Therefore, be sure to determine both the potential risk and reward of the annuity either with or without the rider attached.

Also, annuities and their additional riders can be somewhat confusing. For each rider added on to an annuity, the annuity's contract value will be reduced by the cost of the rider. This may even result in a loss of principal and interest in any year in which the contract does not earn interest or earns interest in an amount less than the rider charge. With that in mind, be sure that you fully understand how the rider that you're considering will work, and what parameters need to be in place in order to take advantage of its benefits.

*Note that annuity guarantees are backed by the financial strength and claims-paying ability of the issuing insurer.

By contacting Stratton & Company, you may be offered information regarding the purchase of insurance products. Any information on investments is meant to be general, as we cannot provide specific guidance regarding your investments or securities holdings. For such guidance, please consult with your own broker/dealer or Registered Investment Advisor.