Response: Thanks so much for the question Pam. I know there is a lot of frustration in owning an investment vehicle that you think you understand or that you buy because of the "the pitch" and then you learn something about it later that wasn't quite clear to you. Riders of any kind, whether they are income riders, long term care riders or death benefit riders are without a doubt the most misunderstood and least explained "add-ons" to an annuity and they can also be the most costly.
A death benefit rider is like owning a small insurance policy inside your annuity contract that guarantees your beneficiaries a certain return on your investment regardless of how your actual investment performs. These are very popular with the sale of variable annuities and the pitch is "protecting your heirs and their inheritance in case you happen to pass away during a down market... they aren't penalized." Some call it a "peace of mind" feature... however the catch is the fee especially with the already expensive variable annuity. I'll give you an example. I prepared an Annuity Report Card this past week for someone who owned a variable annuity for the previous seven years. Her complaint to me was that she was unhappy with the performance and she wanted to better understand why. After dissecting her contract I'm going to show her when we meet this week to review this report that she not only had a Death Benefit Rider attached to her contract but also an Income Rider as well. She was paying 1.50% in M&E charges, .75% in asset management fees .15% in admin charges and a whopping 2.5% in rider fees for both riders. Total fees for her ownership of this annuity is 4.90%. Her total return on investment net of those fees 4.17%. My opinion is that if you are purchasing a variable annuity on the integrity of the underlying performance of the managers that you are already paying... why do you need this extra expensive insurance policy. I get the untimely death thing and I'm sure there have been cases where it has paid off for the consumer, however, how about the fact that these are being sold, or should be sold as long term investment vehicles. If you are paying 1.00% in fees to guarantee a 4% return on a vehicle that long term should do a multiple of that... where's the attraction? Are you betting that your portfolio managers will not return to your heirs 3% or better performance?
Carl Barnowski has 25 yrs. of experience as a retirement income expert specializing in principal protected annuities.