The Annuity Lifetime Income Rider

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

What Is An Income Rider On An Annuity?

A lifetime income rider is an optional add-on to annuities that guarantees a steady income stream for the rest of a person’s life. It provides financial security and helps retirees avoid outliving their savings. With a lifetime income rider, individuals can have peace of mind knowing they will receive regular payments regardless of market fluctuations.

Income Rider On An Annuity

Advantages of an Annuity with an Income Rider

Guaranteed income for life

The primary advantage of a lifetime income rider is the assurance of a steady income stream for the rest of your life or your spouse’s and your life. This can provide peace of mind and financial security during retirement.

Flexibility in retirement planning

A lifetime income rider offers flexibility in retirement planning by allowing you to choose when to activate the income stream. You can adjust your retirement income strategy based on your needs, preferences, and changing circumstances.

Protection against market fluctuations

A lifetime income rider guarantees your income even if your annuity investments underperform. This protection helps insulate your retirement income from market volatility and provides a safety net in uncertain financial times.

The Guaranteed Lifetime Income Benefit Rider: How It Works

Features of a lifetime income benefit rider

When you add a lifetime income benefit rider to your annuity, you gain several key features:

  • Guaranteed lifetime income: The rider guarantees a minimum income level for the rest of her life, even if the annuity’s account value is depleted.
  • Payout flexibility: You can choose when to activate the income stream, allowing greater control over your retirement income strategy.
  • Growth potential: Some riders may offer the potential for income growth based on market performance or other factors.

The cost of an annuity income rider

Adding a lifetime income benefit rider to your annuity will likely increase the cost of your contract. This fee can be a flat amount, a percentage of the account value, or based on the guaranteed income amount. Therefore, it’s crucial to understand and compare the costs of different riders before deciding.

Annuity Income Rider

Who Is An Income Rider Designed For?

  • Pre-Retirees want to understand when and how much money they need to retire.
  • Pre-Retirees want to figure out how much they need to save today for their future retirement income.
  • Seniors worried about outliving their savings.
  • Americans want to know how to generate income in retirement.
  • Retirees want to know how to withdraw money from their 401k and IRA.
Lifetime Income Riders

Income Rider Types

There are two distinct types of lifetime income riders: guaranteed and performance-based income riders.

Guaranteed Income Riders

Guaranteed riders guarantee your retirement checks today or tomorrow by growing at a fixed interest rate (roll-up percentage) each year. The guaranteed lifetime income amount won’t go up or down. It is a fixed income amount for the rest of your life.

Performance-Based Income Rider

Performance-based riders offer a retirement income based on how well the policy performs (with a guaranteed floor) until the owner is ready to start their income stream. The idea is that you have the potential to earn a higher annual withdrawal amount than a guaranteed rider would provide. You can get an idea of the annual withdrawal amount based on product illustrations, but you won’t know. It’s a gamble.

Regardless of performance, there is always a guaranteed floor of how much future retirement income you can generate. The variable isn’t about how much income you can lose in this scenario but how much you can obtain in the future.

Income Rider Types

Income Rider Names

Annuity income riders are a general term for the optional annuity benefit and have many names, including:

Income Rider Payout Types

  • Single Life:  Distributes a fixed income for the remainder of one covered person’s life.
  • Joint Life:  Distributes a fixed income for the remainder of the owner’s and the surviving spouse’s life. The income amount will not change.

Death Benefit Options on Lifetime Income Riders

What happens to the annuity when I die? Designated beneficiaries will receive a death benefit based on the following scenarios:

Single Life Payouts

If you choose a single-life payout, the death benefit will be:

  • The Accumulation or Account Value in a lump sum.
  • Spousal Continuation:  A spousal benefit provision allows the spouse to continue the contract after the contract holder dies. A new annual income amount will be recalculated based on the remaining income values and the surviving spouse’s age at death.
  • Some annuities offer an Enhanced Death Benefit as well. This can be used as a life insurance alternative.

Joint Life Payouts

If you select a joint-life payout, the death benefit will be:

  • Continue receiving the same income amount if there is a surviving spouse.
  • Inherit the Accumulation or Account Value in a lump sum.

Consider Life Insurance Instead

If you want to leave money to your beneficiaries without them having to pay taxes, life insurance might be a better option for you. In some cases, you don’t need to take a medical examination. Compare life insurance quotes to find affordable coverage. Coverage starts at $9.37 per month.

How are Income Riders Taxed?

Understanding the tax implications is crucial when managing any investment. For example, income from an annuity income rider is generally taxed as ordinary income. This means the funds you withdraw will be taxed at your regular tax rate, not the lower capital gains rate.

It’s like going out to eat at your favorite restaurant. You enjoy the meal (your income) but must pay the bill (taxes). Knowing this upfront allows you to budget accordingly, ensuring no surprises.

Which Annuities have the Best Income Riders?

Choosing an annuity with the best income rider requires careful examination. Variables to consider include the guaranteed lifetime withdrawal benefit, the underlying annuity’s performance, and the strength of the issuing insurance company. For instance, annuities offering living benefit income riders might be attractive due to their additional coverage for long-term care expenses.

It’s akin to choosing the best car. You consider its fuel efficiency, reliability, and safety features before deciding. Similarly, choosing an annuity with the best income rider requires considering various factors to ensure it aligns with your financial goals.

Pros and Cons of Income Riders

The Pros

  • Income riders generate a fixed and predictable income in retirement.
  • You can not outlive the income if you utilize a guaranteed withdrawal benefit.
  • Income riders can cover a single-life or joint-life (You + Spouse).
  • They are flexible in turning the income on and off or walking away.
  • You can know today what your guaranteed income will be in the future.
  • You can map out your retirement income goals today and plan how to achieve them for tomorrow.
  • Some benefits enhance to assist with eldercare, estate planning, and inflation.

The Cons

  • Single Payouts can take between 15 and 20 years of distribution before you tap into the insurance company’s money. 
  • It’s even longer for a joint payout.
  • You’re getting your money paid back to you with the hope you will live longer than 15 years.
  • You have to elect up front regardless of whether you use the feature.
  • Most guaranteed withdrawals are fixed, meaning your income paychecks may not increase over time to help with inflation.
  • Fees can be expensive, especially with variable annuities.

Additional Enhanced Features

  • Income riders can be built-in at no additional cost to you.
  • Some riders offer the opportunity to increase your retirement income to keep up with inflation.
  • Income riders can offer enhanced liquidity making your savings more accessible to you.
  • Often riders double their income for eldercare, such as long-term care, nursing home, and home health care. These enhanced features shouldn’t be used as a long-term care insurance alternative. This is called a long-term care rider or living needs rider.
  • Finally, some riders provide an enhanced death benefit as a life insurance alternative. But, again, this means the fictitious value becomes real.

Income Riders Vs. Annuitization

Most annuities can provide an income for life in two distinct ways: annuitization and lifetime income rider. Below is a table that compares the advantages and disadvantages of both.

AnnuitizationIncome Riders
May offer higher payoutsFlexibility to start/stop income
Tax favored withdrawals on nonqualified annuitiesPotential to step up the income amount
No additional costCosts up to 1.25% of account value annually
Irrevocable paymentsFuture income can be guaranteed today
It cannot be surrenderedCan be surrendered
Minimal ROIEarns interests
No liquidityRegular liquidity
No death benefit or series of paymentsLump-Sum Death Benefit
Can not help with healthcare costsCan help long-term care costs
Annuities With Lifetime Income Riders

Key Considerations Before Choosing a Lifetime Income Rider

Assessing your financial needs

Evaluate your financial goals and retirement needs before deciding on a lifetime income rider. Consider factors such as your expected expenses, other sources of income, and desired lifestyle during retirement. This assessment will help determine if a lifetime income rider fits your financial plan.

Evaluating the insurance company

As with any financial product, it’s essential to research the insurance company offering the annuity and income rider. Look for companies with strong financial ratings, a positive reputation, and a history of honoring their commitments to policyholders.

Comparing rider options and fees

Not all lifetime income riders are created equal. Carefully compare various riders’ features, benefits, and costs before deciding. This comparison will ensure you select a rider that aligns with your financial goals and provides the best value for your investment.

Next Steps

An annuity with an income rider may be the answer to ensure a guaranteed retirement income. This optional benefit can provide payments that will last as long as you do. Many riders also offer the opportunity to increase your payments over time to keep up with inflation.

Use our income-for-life annuity calculator to estimate how much income you can receive throughout retirement. Then, request a quote today to determine how much income an income rider could provide you in retirement.

Lifetime Income Rider On Annuity

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Frequently Asked Questions

What is a level annuity?

A level annuity pays you the same amount of regular income from the start of your retirement until the end of any guarantee period or until you die.

What does a rider on an annuity mean?

Your annuity contract offers optional riders for an additional cost. Your financial professional can customize these riders to better protect your priorities.

Do fixed annuities have income riders?

Optional income riders are contract benefits that can be added for an additional fee on fixed index annuities and fixed annuities. These riders guarantee a specific growth rate for your income, often represented by a percentage, which can provide added security and predictability to your retirement income planning.

What is a lifetime income rider?

A lifetime income rider is an optional add-on feature available with some annuities. It guarantees a consistent income stream for the duration of the annuity owner’s life, regardless of market fluctuations. It provides financial security by ensuring a reliable source of income during retirement or other periods of need.

What is a fixed index annuity with an income rider?

A fixed index annuity with an income rider is an insurance contract that allows individuals to invest their money and receive a guaranteed income stream in retirement. This annuity provides a fixed interest rate combined with the potential for additional growth based on the performance of a specific index, such as the S&P 500. The income rider guarantees a certain level of income regardless of market fluctuations.

What is a lifetime income benefit rider?

A lifetime income benefit rider is an insurance feature that guarantees a policyholder a stream of income for the rest of their life, regardless of market conditions. It offers protection against outliving savings and provides a steady flow of funds. This rider is commonly added to annuity contracts to secure a lifetime income source.

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Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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