Annuities Riders and People Who Sell Them (Final Part)
Over the past few weeks, we've been covering anything and everything we can about annuities! Of course, they always pop up during bear markets as a popular form of investing that's less volatile than the stock market. However, as we've talked a lot about annuities, what they are, what they offer, and why they may not always be the deal they're cracked up to be, you may be looking at them a bit more skeptically. As I've said throughout this series on annuities, my goal isn't to totally scare you away from them but to keep you as informed as possible so you may step back for a second and ask yourself, "Is this really for me?".
Today's goal is the same. While we've covered so much about annuities together, there are still a few basics left for us to review. So today, we'll be talking about some more of the seemingly attractive selling points of annuities, called riders. We'll also be looking into who's selling you your annuities, what they get out of it, and what oversight is involved in that process.
SUPER Quick Recap of Parts 1 & 2
In part one, we discussed what an annuity is, the basics of how they work, and why they get popular. Essentially, annuities get popular as investment options when the investing market takes a downturn. This is partly because the marketing of annuities offers guaranteed returns, among other guarantees. They are also seen as a relatively risk-free investment option compared to the stock market's volatility. Annuities are also famous for their tax-deferred options, typically sold to people interested in saving for retirement.
In part two, we got into more nuts and bolts of how annuities work. We talked about how some of the guarantees that come with annuities sound better than the reality, like how guaranteed income percentages are based on growth instead of cash value. We also discussed how guarantees with annuities often start and stop at the institution selling them (depending on the state you're purchasing in) because they aren't FDIC insured. We also discussed companies using bonds and duration matching to sell you annuities with guarantees on returns. We gave some specific examples of how they work. And lastly, we compared annuity returns against S&P Market returns and discussed why someone might want to purchase an annuity.
Annuity Riders – What are they?
The first thing we must tackle this week in our last installment on annuities are called riders! We briefly touched on riders in other installments on this topic; however, I believe they need a bit more depth to understand why they seem attractive but possibly aren't as wonderful as presented.
So... to start from the basics. Annuity.org defines riders as "a provision you can add to your annuity contract to ensure it meets your financial needs." That's a great description of what a rider is; however, I want to make that idea a little more concrete.
A (perhaps overly simplistic) way to think of a rider is by just thinking of it as an "add-on." We're all familiar with streaming sites like Hulu and how when you subscribe, they prompt you to sign up for a STARZ or Showtime add-on for just an extra $5/month. Well, think of an annuity as your Hulu subscription and a rider as that extra Showtime add-on.
To some, riders provide precisely what they're looking for to make their annuity just a bit better. However, to others, riders are something they're sold on and don't really want or need but make their payments more expensive. Often people in the latter group never use their annuity's rider perks, making it worth very little outside of peace of mind. In the meantime, these riders are increasing your fees and reducing your returns.
Different Common Annuity Riders
There are so many riders out there that covering them in this relatively short article would be a nearly impossible task. However, good Financial Cents does a great job and has written a fantastic article outlining eleven riders, what they do, and how they work. So, just to give us a more concrete idea of riders, I will pick three from that list to talk about. Still, I'd highly recommend reading their article if you want more information.
Lifetime Income Benefit Rider
A lifetime income benefit rider operates based on one of the people's biggest fears – running out of money before they pass away. With this rider, you pay a small fee based on your annuity that ensures you'll receive a specific amount of money regularly for the rest of your life, whether that amount exceeds how much you've put into your annuity or not.
Death Benefit Rider
On the surface, an annuity's most prominent disadvantage is that it doesn't always transfer to your loved ones when you pass away. The death benefit rider is designed to counter this disadvantage. By paying extra, you're allowing your loved ones to access a portion of your annuity.
Long-Term Care Rider
The long-term care rider also operates in a way that appeases a specific fear that many face in their retirement years. As we get older, we get sick. And as medicine continuously improves, there are more and more ways to treat illnesses and get better and live longer. However, these often require expensive treatment and extended stays in the hospital. That's where this rider comes in – for an extra amount of your payments, you receive the benefit of long-term care being covered by your annuity under certain conditions.
Critical Considerations of Common Riders
The last section offered a nice and cheery view of annuity riders. These are often the great selling points of the riders and offer people a sense of security. In this section, we'll take a more critical view of the three example riders listed above.
Lifetime income benefit riders sound great to those worried about running out of money in retirement. Annuities typically pay out for a specific number of years. The most obvious criticism of this rider is that outliving a policy that lasts for 20-30 years after retirement is not typical. However, there's a less obvious criticism, opportunity cost. What you pay to your annuity and rider each month, allocated to a higher-growth investment, could offer a longer and larger return in retirement.
Next, while they sound great, Death Benefit Riders often come with fine print. Before purchasing a death benefit rider, you should speak with your financial planner to get an idea of how much would be paid out to your loved ones at various points in the annuity's lifetime. In addition, you want to know if your death benefit includes principle and interest, just principle, or just a portion of principle. It may end up not being as much as you'd like. Also, suppose death benefits are something that you're concerned about. In that case, you should speak with your financial adviser representative about what financial options will offer the most for your family and compare that to how much the rider will cost over time.
Lastly, long-term care riders. Like all the others, these riders sound fantastic as an annuity selling point. However, if push comes to shove, you want to ensure you're getting your money's worth. Go over your policy with an adviser to ensure you know how much your annuity's rider will cost, how much it will cover, and how long that coverage lasts. Long Term Care riders, like the others, come with fine print and parameters. For example, you may find that your rider only covers up to X months in long-term care or up to X amount. Often riders only cover one long-term care stay for one person.
Should You Get a Rider with Your Annuity?
It's difficult to generalize whether you should get an annuity with riders or not. It partly depends on your financial goals and what you want to get out of your annuity. However, it also comes down to state/local regulations and the policy coverage of your annuity's rider. As we just discussed, many riders that can be added to annuities sound great. Still, you need to be sure that it covers what you think it does – the best way to do that is to speak with a financial planner to ensure your annuity and riders are aligned with your short-term and long-term financial goals and needs.
Often, with riders, you really must use them, or it's money down the drain. So, if you aren't sure whether or not a rider is for you – you may want to stay away. But, on the other hand, riders also don't go towards making you more money, and once they're added to your policy, they're there to stay.
Who's Licensed to Sell Annuities?
One great aspect of working with a financial planner that most clients aren't even aware of is that they're covered by REG BI. REG BI is also known as the SEC's (Security Exchange Committee) Best Interest. It was passed in 2020, and according to FINRA, this regulation "establishes a "best interest" standard of conduct for broker-dealers and associated persons when they make a recommendation to a retail customer of any securities transaction or investment strategy; involving securities, including recommendations of types of accounts."
While they don't go without licensing requirements, life insurance agents aren't held to the same standard of best interest when selling annuities or their riders. As a result, the agent could act in the best interest of their company and themselves. Therefore, it's imperative to know who's selling you an annuity, what licenses they have, and what steps they're taking to work in your interest.
Insurance companies and their agents are instead licensed on a more state-to-state basis, which means they aren't as standardized or regulated as actual financial institutions. The balance goes as far as to say that the world of annuities is still "something of a 'wild west' where anything goes."
Making an Informed Decision
While annuities and those who sell them can be fantastic, the truth is that there's just no one-size-fits-all when it comes to your personal finance. So any annuity you're considering buying should be something you think about in-depth. Run it by your financial planner or adviser representative, weigh the pros and cons, and ensure that you have an in-depth understanding of how it and any riders that come with it.
There are instances when an annuity with riders may be an excellent option for you. However, before you pull the trigger on one, you should ensure that it's the BEST option for you. After all, the last thing you want to do is get in too deep with an annuity and then realize that it costs too much and isn't suitable for your needs.
If you're considering purchasing an annuity or weighing the pros and cons of riders, please call or email to schedule an appointment with me. We can create a financial plan that can fit into your budget and help you pave the road to your financial goals.
Until next time...this is Melissa Making Cents!
Melissa Anne Cox, CERTIFIED FINANCIAL PLANNER™, is a College Planning and Student Loan Advisor and Financial Coach in Dallas, Texas.