An income rider is a lifetime income guarantee added to either an indexed or variable annuity. Its main function is to avoid annuitization, allowing you to have greater control and flexibility without having to be locked into a payout that never ends. Regardless, the insurance company is obligated to pay income guarantee as long as you’re still living, even if the annuity contract value is depleted.

Usually, this optional rider costs 1%-2% but can also be included in the contract at no cost. Contingent on insurance company, the cost can either increase yearly–outlined in the contract–or the participation will be less if it doesn’t have a cost. Once purchased, you may or may not be able to terminate the income rider as it may be built-in. However, once it is voided, the income rider can no longer be reinstated.

Income riders sold throughout the years include:

• Guaranteed Minimum Accumulation Benefit (GMAB): Guarantees a minimum value each year.
• Guaranteed Minimum Withdrawal Benefits (GMWB): Guarantees a minimum percentage each year.
• Guaranteed Minimum Income Benefit (GMIB): Guarantees a minimum income amount each year through annuitization.
• Guaranteed Lifetime Withdrawal Benefit (GLWB): Guarantees a minimum withdrawal amount each year.

Out of all income riders the GLWB is the most commonly used. It offers a guaranteed lifetime income without annuitization–or lock in–payments. But not all contracts are created equal and understanding all the components are important.

The majority of insurance agents and financial advisors normally explain the income rider crediting percentage rate–or “roll-up rate”–the insurance company’s percentage applied to the income account value–or “benefit base.” Depending on the interest rate environment, this number can fluctuate between 5%, 6%, 7%, or 8% (or possibly higher). Don’t be misinformed that this percentage is available for withdrawal or as a death benefit.

When calculating lifetime income, the payout percentage rate–or withdrawal rate–is often missed which is the most important part of determining the actual dollar amount paid to you. It’s safe to assume that if the roll-up rate is higher, the withdrawal rate will be lesser.

The moving parts of an income rider to pay attention to are:

• Roll-up rate: The insurance company’s rate applied to the income account benefit base (e.g. 5%, 6%, 7%, or 8%).
• Withdrawal rate: Lifetime income is calculated by multiplying the benefit base by the withdrawal rate (based on your age).
• Benefit base: Used to compute the lifetime income and not an amount that is available for withdrawal or a death benefit.
• Lifetime income: The annual amount you may withdraw each year under the income rider.