Do you need an income rider?

Many people worry about outliving their savings. An income rider is one tool that can help address that concern.

But it comes with costs and rules. Here is how it works, so you can decide if it fits your plans.

What an income rider is

A rider is an optional feature you add to an annuity contract, usually at extra cost. An income rider is often called a guaranteed lifetime withdrawal benefit.

It lets you take up to a set amount each year for the rest of your life, based on the rider's rules. Payments can continue even if your account value runs down to zero.

Income riders are often paired with fixed indexed annuities, which credit interest using terms like the participation rate. Payments depend on the claims-paying ability of the insurer, and annuities are not FDIC-insured.

The income base vs. your account value

This is the part that confuses many people. An annuity with an income rider usually tracks two numbers.

• Account value: The real money in your contract. This is what you could withdraw, minus any surrender charges.
• Income base: A number used only to figure your lifetime income. It is not cash you can withdraw.

Before income starts, the income base may grow by a set rate under the rider's terms. That rate is not the same as interest earned on your account value.

For example, a hypothetical contract might show an income base of $120,000 and an account value of $100,000. If you cashed out, you would get the account value, not the income base, and surrender charges could apply.

What it costs

Most income riders charge an annual fee. Depending on the contract, it may be a percentage of the income base or of the account value.

Over time, the fee can reduce the money you have available. It can also reduce what's left for your family.

Ask how the fee is figured and whether it can change. Your contract will spell this out.

Rules to know

Income riders come with their own rules. These vary by product, carrier and state.

• Some riders have a waiting period or a minimum age before income can start.
• Your payout amount often depends on your age when you begin.
• Taking out more than the allowed amount can reduce your future income.
• Some riders offer joint options for spouses, often with a lower payout.

Withdrawals of earnings are taxed as ordinary income. Taking money before age 59½ may also bring a 10% IRS penalty.

Who might consider one

An income rider is not right for everyone. It may be worth a look if:

• You want a steady paycheck in retirement on top of Social Security.
• You're concerned about running out of money later in life.
• You plan to keep the annuity for many years.

It may be less suited for you if:

• You may need large lump sums from the account.
• Leaving the most money to heirs is your top goal.
• Other income sources, like a pension, already cover your needs.

You can read more about these contracts on our fixed indexed annuity page.

Common questions

Is an income rider worth the cost?

It depends on how much you value lifetime income compared with the fee and the limits it adds. Asking to see how the contract works with and without the rider can help.

Does the income base go to my heirs?

Generally no, since the income base is used only to figure income. Your heirs would typically receive whatever death benefit the contract provides instead.

Bottom line

An income rider can add lifetime income to an annuity, but it isn't free. The fee, the income base rules and the limits on withdrawals all matter.

The right choice depends on your income needs, your other savings and your goals for your family. Our team can help you weigh these trade-offs.

Have questions about your situation? Book a complimentary call with our team.

This article is for general education only and isn't financial, tax or legal advice. Product features vary by carrier and state. Talk with a licensed professional about your situation.