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An Introduction to Riders

Many of the guarantees associated with annuities are features of optional add-on benefits called riders. Riders can provide enhanced death benefits, guaranteed income for life, guaranteed growth factors, or even long-term care insurance in some cases. Below is a brief introduction to the various riders available in the marketplace today, in order of the most common to least common. Take care to compare the features from contract to contract instead of the name of the rider, as the naming convention is not standardized between insurance companies.


Case Study: Inflation Adjusted Assessment of the Guaranteed Lifetime Withdrawal Benefit (GLWB) Rider

An appealing rider available for Variable Annuities, the GLWB guarantees that a specific amount can be withdrawn for life. The guaranteed withdrawal amount is typically fixed when withdrawals begin, exposing them to the damaging impact of inflation. The primary benefit is that those payments will continue forever providing some level of longevity insurance, however diminishing that may be, without forfeiting the cash balance upfront.

At we analyzed a hypothetical variable annuity with a 5% GLWB^, using inflation adjustments to determine the real value over time. The analysis includes the two most recent bear markets (tech in 2000-2002, and subprime in 2008-2009).

Our hypothetical annuity offered little to no protection from either of the bear markets. A mutual fund with the same asset performance (but different fees) was always worth more, even at the bottom of a bear market. Note that the projected cumulative expenses paid to the insurance company were substantial and account for much of the difference in performance.

After 25-30 years, the total fees paid will exceed the original investment. And inflation and annuity fees are so damaging that the guaranteed income is unlikely to ever break even with an equity mutual fund investment with 5% annual withdrawals. If the market was flat forever from today on, the utility of the GLWB would breakeven with the mutual fund in 2060.

^5% growth factor, 5% guaranteed withdrawals
*Hypothetical investment equivalent to 70% MSCI World/30% BofA Merrill Lynch US Treasury Index. Performance presented inclusive of dividends and interest less an assumed annual mutual fund expense of 0.81% (the average asset-adjusted expense ratio for balanced funds in 2011 per Morningstar).
**Hypothetical investment equivalent to 70% MSCI World/30% BofA Merrill Lynch US Treasury Index. Performance presented inclusive of dividends and interest. Less assumed annual annuity expenses of 3.44%. The assumed annual expenses included Mortality & expense Risk of 1.18%,1 Administrative Fees of 0.19%,1optional Guaranteed Minimum Withdrawal Benefit (GMWB) of 1.03%,1 and Fund Expense for underlying funds in a variable annuity of 0.94%.1
1Insured Retirement Institute, 2011 IRI Factbook (Washington, DC: IRI, 2011), 38

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