One of the primary objections from people considering annuities for inclusion in their retirement plan is their lack of liquidity. Ideally, we could all enter retirement knowing exactly how much money we will need and for how long. But realistically, we have to plan for the unexpected.
Crisis waivers allow annuity purchasers to do just that by creating a sort of escape hatch in the event that they need to access their money sooner than they’d planned.
How Are Crisis Waivers Different from Riders?
Some insurance companies refer to crisis waivers as riders, so the first thing you need to be aware of is that, while waivers are contract enhancements for which insurers may charge an additional fee, they don’t work exactly the same as riders do.
Crisis waivers permit the annuity owner to withdraw money before retirement without incurring a surrender charge, whereas riders provide benefits to cover a range of financial and estate planning needs.
These waivers are attractive to people who are concerned about giving up access to a large amount of money for a long period of time.
Insurance companies offer crisis waivers for some of the most common concerns among retirees. In this way, they allow consumers to strike a balance between securing their future and maintaining resources for unexpected life events.
Types of Waivers:
- Death
- Hospital
- Nursing home
- Terminal Illness
- Disability
- Unemployment
Riders exist to make annuities feasible for a diverse group of people. Because annuities are intended to provide a reliable income stream in retirement, basic contracts are structured to achieve this goal. For example, insurance companies expect deferred annuity owners to allow the value of the contract to grow tax-deferred for an extended period of time.
If the annuity purchaser fully understands the nature of the product, he or she also expects to leave the premium to accumulate over 20 or 30 years.
Riders allow annuity buyers to extend the basic coverage of the contract to better align with their needs. These enhancements fall into two categories: living benefits and death benefits.
For example, a guaranteed minimum income benefit specifies a minimum payout during the life of the annuity owner, whereas a guaranteed minimum death benefit permits a new annuitant to receive payments if the owner dies during the accumulation period.
Crisis waivers, like riders, provide protection in the event of unforeseen circumstances, but they are not an extension of insurance coverage. Rather, they guarantee that the surrender charges will be waived if the annuity owner needs to take a portion of the cash value for nursing home expenses, terminal illness medical costs or other such qualifying life events.
Commonly Confused Riders and Waivers
The similarities between rider and waiver terminology can confuse the average consumer. Add to that the fact that insurance companies often conflate the two, and it’s no wonder annuity buyers find it challenging to determine what they need.
The best way to protect yourself and your finances is to do your research and ask questions.
The National Association of Insurance Commissioners recommends asking the following questions about surrender charges and waivers:
- Are there withdrawal or surrender charges or penalties if I want to end my contract early and take out all of my money? How much are they?
- Can I get a partial withdrawal without paying surrender or other charges or losing interest?
- Does my annuity waive withdrawal charges for reasons such as death, confinement in a nursing home or terminal illness?
Long-Term Care Rider vs. Nursing Home Waiver
Long-term care riders provide benefits to cover a range of long-term care services. These riders have limitations depending on the insurance carrier and the contract terms, and they are not the same as nursing home waivers, which waive surrender charges for the surrender of the full contract or a specified number of withdrawals prior to annuitization.
The annuity contract will contain the full details of any waivers or riders, so be sure to read the terms and limits carefully.
Waivers are generally less complicated. For example, in California, agents who sell annuity contracts containing long-term care riders must complete additional training, whereas no such special training is required to sell contracts with nursing home waivers.
Disability Income Rider vs. Disability Waiver
A disability income rider ensures that your income benefits will be higher for a limited period of time if you become disabled and lose your income. This is different from a disability waiver, which waives surrender charges for withdrawals due to a disability.
Insurance companies have different criteria for assessing a disability. For example, some insurers may consider a person disabled if they can’t work at all, while others may consider a person disabled if they can’t work in their current occupation.
Waiver of Surrender Charge
Some contracts will refer to a “waiver of surrender charge rider” or simply a “surrender charge waiver.” This term encompasses crisis waivers as well as other types of surrender charge waivers the insurer may offer, such as asset transfers.
Surrender charges, which are fees assessed for withdrawing funds during the surrender period, are typically waived for the withdrawal of up to 10 percent of the annuity value per year.
Surrender charges generally decline as the annuity matures, but it’s important to know how long the surrender period will last and what the surrender charges are before committing to a purchase. If you want to protect yourself against potential charges in the event that you need to make an early withdrawal, talk to your agent about additional surrender charge waivers.
Waiver of Premium
Some annuity contracts offer a waiver of premium. New Hampshire’s government website published a Buyer’s Guide to Annuities that states that some insurance companies will pay an annuity owner’s premiums if he or she becomes disabled.
This benefit is typically associated with life insurance policies, so it’s worth reiterating that annuities are not life insurance policies — although these products share some terminology and similar contract features.
