Return of Premium Rider

How a Return of Premium Rider Works

Annuities can create a guaranteed stream of income for a predetermined number of years or even for the rest of your life. With fixed annuities, the term length, the annual return and the rights you have as an annuity holder will be determined in advance. These factors can make annuities extremely useful tools for planning and saving for the future.

However, annuities are not always the best tool when it comes to taking care of your beneficiaries, since they do not automatically provide death benefits. When you die, your contract is terminated and the provider keeps the remaining value of the annuity. 

For some people, that level of unpredictability is unsettling, but it can be addressed with a return of premium rider.

According to the National Association of Insurance Commissioners, a rider is essentially a new feature added to an annuity for an additional cost. A return of premium rider – also called a return of premium death benefit rider – specifies that following your death, the remaining value of your annuity’s premium will be paid out to your designated beneficiaries.

A return of premium rider essentially converts an annuity into a sort of modified life insurance policy. If you purchase a 20-year annuity but die five years into the annuity’s lifetime, your beneficiaries will receive a “refund” of sorts for the remaining premium.

It’s important to keep in mind that your beneficiaries only receive a payout if there is remaining value in the contract. A return of premium does not guarantee funds will be left to your heirs. For example, if you die after the annuity has stopped paying out or exceeded its premium, then your beneficiaries will receive nothing – even if you included the rider.

Some providers also offer a return of premium benefit with fixed annuities as protection from unpredictable circumstances. The benefit provides the ability to surrender during the withdrawal charge period and receive the initial purchase premium minus any prior withdrawals. In addition, some contracts guarantee you’ll be able to get at least your initial premium out of the contract at any time.

Many people believe they lose the money invested in an annuity if they pass away, but that isn’t always true. Choosing a return of premium rider protects you from that concern, but you should ask yourself if you really need that protection before deciding to include it in your contract.

Brandon Renfro, Ph.D., CFP®, RICP®, EACo-Owner of Belonging Wealth Management

As a Certified Financial Planner™ professional and Retired Income Certified Professional®, Brandon Renfro is well-versed in the financial information and strategies needed to meet retirement goals. In addition to co-owning Belonging Wealth Management and assisting clients, Brandon writes regularly for financial publications.

Pros and Cons of a Return of Premium Rider

There are pros and cons to opting for a return of premium rider. It can be an effective method to protect against the risk of not receiving the full value of your annuity, while also providing for your loved ones.

However, riders can be costly, and adding one does not automatically guarantee that your beneficiaries will receive something.

Pros

The most obvious pro of adding a return of premium rider to your annuity is the ability to combine life benefits (annuity payments) with death benefits (a premium payout in the event of your death).

This can go a long way in helping remove the worry of not getting your money’s worth from your annuity. 

If you live until the end of the annuity’s term, you will receive all of the cash payments you were promised. However, if you die before the contract is fully paid out, a return of the remaining premiums will be paid to your beneficiaries.

Moreover, while riders can be pricey, adding a return of premium rider has the potential to save you money elsewhere by reducing or even eliminating the need for a life insurance policy.

Depending on the initial premium amount and how long you’ve been receiving payments, the money received by your heirs may be enough to cover funeral expenses and other end-of-life expenses, as well as provide them with some much-needed cash reserves.

Cons

While return of premium riders have many perks, there are notable drawbacks to consider. One major factor is cost.

The total cost of a return of premium rider will vary from company to company. Depending on your provider, the rider can cost, for example, as little as 0.30% of the premium. On the higher end, the add-on can cost exceed 1.5%. 

While these figures are not necessarily deal breakers, they do decrease the net benefit an annuity can provide. For example, say you purchase an annuity that provides an annual rate of return of 5%. Adding a return of premium rider that costs 1% of the premium will effectively reduce your annual return to 4%. When multiplied over the term of the annuity, the impact of these costs can quickly add up. There may be an annual custodial cost as well.

Also, keep in mind that the more riders you add, the more the potential value of your annuity will decrease. While there could be numerous riders that you are interested in, it may not be feasible to add more than a couple.

If you are interested in a return of premium rider, it makes sense to compare costs from different providers to find the option that is best for you.

Is a Return of Premium Rider Right for You?

When deciding whether to purchase an annuity with a return of premium rider, there are several factors to keep in mind. 

Factors to consider when weighing a return of premium rider:

• Do you have financial dependents who rely on you?
• Do your age and health make it likely you may die before your annuity has paid out?
• Are your beneficiaries already covered elsewhere in your financial portfolio?

The most important question to consider is whether you currently have any financial dependents. If you do not have a spouse, children or any other direct financial dependents who are relying on you for money, then this particular rider may not be worth the additional fee. 

You will have the option to designate another individual or an organization as your beneficiary. However, decreasing your premium by a notable amount in exchange for the rider may not be worth it if no one is directly relying upon you.

Other important factors to consider are your current age, health and life expectancy. If you are older and have any known medical conditions, choosing to add the return of premium rider may make more sense. If you are younger, healthy and believe that you are likely to outlive the annuity’s term, then foregoing the rider might be a wiser decision.

Lastly, you will need to take a close look at the rest of your financial portfolio. Cash, bonds, equities, real estate and other sources of wealth may be transferred to beneficiaries in the event of your death.

In addition, individuals who already have substantial life insurance coverage may not need to consider the return of premium rider as seriously as those who don’t have as much security or additional coverage. While a return of premium rider might not be universally needed, it can certainly be a valid option for many people who are considering buying an annuity.

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Frequently Asked Questions about Return of Premium Riders

Editor Malori Malone contributed to this article.