The Risk

• A variable annuity contract contains a selection of subaccounts that invest directly in stocks, bonds, real estate or other commodities. The values of these subaccounts will fluctuate with the markets, and there is no guarantee of principal or return on capital. This risk cannot be avoided in and of itself.
  
  

The Guarantees

• Death benefit riders usually guarantee the beneficiary the largest of either the current contract value, the previous highest contract value or a sum equal to what the contract would currently be worth if it grew at a certain rate each year from the time of purchase. For example, assume that you put $100,000 in a variable annuity with a death benefit rider and then die 20 years later. If the contract grew at an average rate of 6 percent per year, then it would be worth about $320,000 at the time of your passing. However, at one point, the contract was worth $350,000, so that is the amount that the beneficiary would receive. Or if your contract only grew at an actual rate of 3 percent per year and your death benefit stated that you would get a sum equal to what the contract would grow to at 5 percent per year, then you would get that amount instead.
  
  

Death Benefits

• Living benefit riders usually ensure that the recipient will receive a stream of income based upon the largest of the same three variables that are used for death benefit calculations. There are two main types of living benefit riders: Guaranteed Minimum Income Benefits and Guaranteed Minimum Withdrawal Benefits. The former method guarantees that the investor will receive back his or her principal over a certain period of time, such as 10 years. Therefore an investor who purchases a $100,000 contract could expect to receive $840 over 10 years when the contract is annuitized (meaning when the contract begins making regular income payments to the investor). In this manner, the principal in the contract is guaranteed to be recovered, regardless of how the subaccounts perform. The withdrawal benefit guarantees the investor's principal in the same manner, except that the amount paid out is measured as a percentage of principal that can be paid each year until all of it is recovered.
  
  

Living Benefits

• It should be noted that these riders come at a cost, typically somewhere between one-half and three-quarters of a percent of the assets in the contract each year. These fees will be assessed each year regardless of whether the guaranteed benefits ever kick in or not, so investors should think carefully before purchasing them. Furthermore, investors must annuitize their contracts in many cases before the benefits will apply, which means that they must elect an irrevocable payout option, such as a straight or joint life payout, in order for the riders to be effective. Beneficiaries who die before they see their principal returns have effectively lost out on this benefit. Many financial experts feel that living benefit riders are not worth the cost they incur to the contract owner.
  
  

Who Guarantees the Riders?

• Variable annuity riders are backed by the issuing carrier just as with fixed annuities or insurance policies. The dollar value of the benefits covered in the riders must be matched in the carrier's cash reserves on a dollar-for-dollar basis. Furthermore, if the variable annuity carrier should become financially insolvent, then reinsurance companies will step in and cover the guarantees.