Annuities provide a set series of cash flows for a predetermined number of years. The term length, the annual return and the rights you have as an annuity holder will all be determined in advance. These factors make annuities extremely useful tools for planning and saving for the future.
However, annuities on their own do not provide death benefits. In these cases, once you die, the contract will be terminated and the provider will keep the remaining value of the annuity. On the flip side, if you purchase an annuity that guarantees income for life and you deplete the funds in the annuity before you die, the insurance company is contractually obligated to continue making income payments to you.
For some people, the unpredictability is unsettling. For an added layer of protection, you might consider purchasing an annuity plan that offers a return of premium rider.
A rider is a benefit that can be added to the default annuity contract. A return of premium rider, also called a return of premium death benefit rider, is a provision in a contract that specifies that following your death, the remaining value of the premium will be delivered to a selected beneficiary or beneficiaries.
Effectively, a return of premium rider converts an annuity into a sort of modified life insurance policy. If you purchase a 20-year annuity, but you die five years into the annuity’s lifetime, your beneficiaries will receive a refund of the remaining premium.
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, less any prior withdrawals. Some contracts guarantee you’ll be able to get at least your initial premium out of the contract at any time.
Benefits of a Return of Premium Rider
The most obvious benefit of a return of rider premium is that it combines life benefits (annuity payments) with death benefits (premium payout in the event of your death), which helps 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. If you die before the contract is fully paid out, a return of the remaining premiums will be paid to your beneficiaries.
By adding a return of premium rider to your annuity, you may be able to reduce or even eliminate the need for also purchasing a life insurance policy. Depending on initial premium amount and how long you’ve been receiving payments, the money received by your heirs may be enough to cover funeral expenses, other end of life expenses and provide them with some much-needed cash reserves.
Drawbacks of a Return of Premium Rider
Of course, as you will find when making any major financial decision, the benefits of adding a return of premium rider will also come with drawbacks.
The total cost of the return of premium rider will vary by provider, meaning that if this rider is something you are sincerely interested in pursuing, you will want to compare multiple different annuity providers. The rider can cost, for example, as little as 0.30% of the premium. On the higher end, the premium can cost as much as 1.7% of the premium, according to one provider’s website.
While these figures are not necessarily deal breakers, they do decrease the net benefit an annuity can provide. Assuming that the annuity provides an annual rate of return of 5% for example, 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 really begin to add up. There may be an annual custodial cost as well.
Is a Return of Premium Rider Right for Me?
When deciding whether to purchase an annuity with a return of premium rider, there are several factors you will need to consider. The first thing you will need to consider is whether you currently have any financial dependents. If you do not have a spouse, children or any other direct financial dependents, then this particular rider might not be worth the additional fee. You will have the option to designate another individual or an organization as your beneficiary, but financial dependency will create a greater sense of urgency.
You will also need to consider 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 for you. If you are younger, healthy and believe that you are likely to outlive the annuity’s term, then foregoing the rider might be easier to justify.
Lastly, you will need to take a close look at the rest of your financial portfolio. 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 that level of coverage. Cash, equities, real estate and other sources of wealth may also be transferred to beneficiaries in the event of your death.
While the return of premium rider might not be universally needed, it can certainly be a valid option for many people considering buying an annuity.
