As a prospective annuitant, you can pick from dozens of contract options when building your retirement portfolio, like long-term insurance funds or a minimum monthly income allowance. With these additions, you'll avoid many sleepless nights worrying about "what if" scenarios. But extra assurances come at a cost.

Although these "annuity rider" features aren't essential, they’re worthwhile to add when personalizing your contract. Learn more about the purpose of annuity riders and how they put you in the driver's seat when purchasing an annuity.

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What’s an annuity rider? Annuity riders explained

Think of annuity riders as the add-on subscriptions of the annuity world. Similar to subscribing to Starz via a streaming service you already have (like Crave), riders are legal provisions you have the choice — but not the obligation — to put into your annuity product.

While you could have a fully fledged, annuity without tacking on riders, these extra features add protections not included in the foundational contract. Riders generally come with an additional cost, but they can provide valuable protections like a guaranteed minimum income, inflation resistance, and or access to your account value after a health emergency.

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Benefits of annuity riders

Annuity riders can help give you clarity over your future. With one or more riders in place, you can breathe easy, knowing that certain annuity aspects are fixed.

Here are a few benefits of adding annuity riders: 

• Customization: Adding riders to your annuity allows you to customize your annuity to your preferences, goals, and financial situation.
• Guaranteed income: Stressed about outliving your savings? Stomach churns when the stock market swings? There are income-specific riders help to quell these fears with guaranteed minimum withdrawals.
• Stability: Besides solidifying a set income amount, some riders factor in rising living costs. With inflation-focused riders in an annuity, your purchasing power stays steady even as costs creep.
• Risk management for emergencies: Riders can cover unexpected costs, such as those following a medical emergency. Some annuity riders also account for disability or long-term care, allowing you to access your funds.
• Estate planning: Riders like death benefits can help provide a financial cushion after the policyholder's passing. Regardless of the annuity's performance, these riders set a minimum value available for beneficiaries, helping ensure an annuitant's family enjoys the maximum financial security.

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6 types of annuity riders

Here are six of the most common annuity riders, most of which fall under the “living benefit rider on an annuity” category versus being a death benefit.

1. Death benefits

With death benefit riders, annuity owners guarantee the payout their loved ones receive after their passing. Often, these riders transfer the initial premiums paid or the current account value of the annuity to designated heirs. There are, however, more sophisticated options, such as stepped-up death benefit riders, which increase the payout threshold and take advantage of market growth.

Whatever method you choose, the goal is to leave a financial legacy for loved ones.

2. Guaranteed lifetime withdrawal benefit (GLWB)

Annuity owners most concerned about outliving their savings turn to the guaranteed lifetime withdrawal benefit (GLWB) rider. With this rider in place, annuitants withdraw a preset percentage of their account balance for a set period of time, including the rest of their lives, even if their annuity's value drops to $0.

The guaranteed rate for a GLWB rider depends on the withdrawal age, with lower yields for annuitants with a longer life expectancy. In exchange for these consistent withdrawals, you’ll often pay an annual percentage, but some annuity products like Gainbridge^®'s ParityFlex™ include a GLWB for no additional cost.

3. Guaranteed minimum accumulation benefit (GMAB)

Rather than ensuring lifetime income payments, this rider aims to preserve an annuitant's principal. No matter how the market's fluctuations impact an annuity's valuation, GMAB riders lock in a minimum amount at withdrawal time. For example, a GMAB might guarantee the value of your principal, meaning you can't lose money even if the value of the annuity's account value drops.

While GMAB annuities let holders enjoy market gains, they provide a floor where their account value can't fall below.

4. Impaired risk rider

For annuitants with a pre-existing health condition, the impaired risk rider adjusts the average premium payments to account for the policyholder's life expectancy. After a contract holder proves their medical condition with a doctor's report, the annuity provider increases premium payments and adjusts the contract terms while providing financial protection.

These annuity riders are commonly used with life insurance policies to provide accessible coverage to individuals with a higher risk of denial.

5. Long-term care (LTC)

Annuitants may have the option to add a long-term care (LTC) rider to cover extra medical expenses such as assisted living or home care. With this add-on, policyholders receive bonus funding to help with the additional costs of LTC services. LTC riders reduce the odds that a policyholder’s higher cost of care eats into their primary retirement savings.

6. Cost-of-living adjustment (COLA)

Retirees afraid of increasing costs sometimes add a COLA rider to their annuity. COLA riders incorporate data on the average cost of goods and services via the Consumer Price Index (CPI) into the annuity's value. At regular intervals, annuitants with a COLA rider are eligible for an increased payout if inflation rises, helping retirees maintain their standard of living.

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Key considerations when choosing an annuity rider

Even if you’re already eyeing a particular benefit, it's wise to take the time to digest a rider's disclosures. Never rush into adding a rider — consider the following factors before making a decision:

• Additional costs: A rider’s generally always cut into expected growth. Estimate every fee involved — including premium increases, payout decreases, and surrender charges — to determine if you can financially accommodate the rider.
• Tax implications: Besides the extra annuity costs, riders sometimes raise your yearly tax burden. For example, if you have riders that increase your yearly income, you'll owe more taxes.
• Alignment with financial goals: List your top concerns and any non-negotiable features to find the most attractive annuity riders. For example, if your primary objective is to secure a stable income, focusing on income-generating options like a GLWB makes sense. And those most concerned with estate planning and transferring wealth might focus on a death benefit.
• Risk factors: From market volatility to pre-existing health conditions, annuity riders can take many uncertainties off your table. If you have specific concerns weighing on your mind, see which riders take your stress level down a notch.
• Limitations or restrictions: Comprehensively explore how riders influence access to your funds and any associated eligibility requirements. Features such as withdrawal limits, percentage deductions, and premium minimums affect your fund's liquidity and accessibility.

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Regulatory considerations and compliance

To protect investors, state and federal laws regulate the sale of annuity products and riders, and insurance providers must follow applicable requirements. These regulations include issuing transparent disclosures and suitability standards so investors know what they're getting involved in and whether it fits their financial goals.

Reviewing this information not only ensures you're working with a trusted, compliant provider but also gives you crucial details on your legal requirements so there are zero unwelcome surprises.

Examples of annuity riders

With countless personal details, external factors, and legal stipulations, riders always affect annuities on a case-by-case basis. However, these examples highlight the impact this add-on feature might have on someone's retirement funds:

• John is 60 years old. He purchases an immediate annuity with a death benefit rider and deposits a lump sum of $100,000 for monthly payments of $7,700 that start when he’s 65. If John dies within the first five years of annuitization, this rider transfers the initial principal invested in the annuity (regardless of performance or withdrawals) to the contract holder's beneficiaries.
• Joelle plans to retire in the next decade and wants to reduce market volatility on a variable annuity. For greater protection, Joelle opts for a GLWB rider with a 0.5% annual rider charge and a guaranteed 5% compounding rate for a 10-year accumulation period. Within the decade, the market pays out 4% annual returns on Joelle's original premium, but the GLWB rider means she enjoys an extra 1% in compounded returns.