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Variable annuities have always been an interesting hybrid: one part insurance product, one part investment vehicle. After funding your account, you receive a series of payments for life, just like a fixed annuity. But rather than resigning yourself to a modest rate of return, you can select a series of mutual fund-like sub-accounts that offer the potential to beef up your balance. (For a more thorough backgrounder, see Getting the Whole Story on Variable Annuities).

Yet there's a price you may pay for hitching your annuity to the stock and bond markets: The chance that your account could actually lose value over time. A number of issuers have tried to quell those concerns by offering guaranteed-benefit riders. They'll cost you extra, but at least you have the assurance that your later payouts won't shrivel up because of an economic downturn.

One option for annuity buyers is the Guaranteed Lifetime Withdrawal Benefit (GLWB). As its name implies, the rider allows you to withdraw a minimum annual amount from your account for the rest of your life; the actual sum depends on when you start pulling out funds. A 60-year-old may be able to take out 4% of the base amount each year, while someone who waits until age 80 might be allowed to take home 6% or 7%.

What makes these riders unique is that they differentiate between the value of your investments – that is, your account balance – and your benefit base. Even though your account value can theoretically drop due to market conditions, the base amount upon which minimum withdrawals are calculated remains guaranteed.

Some GLWB provisions enable you to peg withdrawals to the account's highest value to date, even if it's dropped since then. Let's say your account was worth $100,000 when you took out the rider, but two years later it shot up to $120,000 because of stock market gains. Now, it's down to $90,000. If you're allowed a 4% withdrawal each year, you can still take out $4,800. That's because the issuer calculates the benefit base based on your account's peak value ($120,000 x 0.04), not its current worth.

Figure 1. Variable annuities with a Guaranteed Lifetime Withdrawal Benefit sometimes allow you to lock in your account's highest value, even if it should drop at a later date. The amount you can withdraw penalty-free is based on this peak value.

: The Vanguard Group

Another common type of rider is the Guaranteed Minimum Income Benefit (GMIB), which proves a floor for your lifetime payouts when you annuitize your contract (that is, convert your investment into a stream of payments). A typical GMIB credits your account with a set interest rate – perhaps 4% or 5% – even if the underlying portfolios in your account lose value. Thus, your benefit base can rise, even though the account balance is decreasing.

Typically, GMIBs require a holding period of 7-10 years. However, some plans permit you to make withdrawals from your account in the meantime. Just beware that doing so reduces your lifetime payments once the annuitization phase begins.

MetLife's popular GMIB Plus rider, for example, credits your benefit base (on a compounding basis) by 4.5% each year. You can take up to a 4.5% annual withdrawal, in which case you forgo the credit. Or, if you take a 2% withdrawal, the insurer will credit you the 2.5% difference (4.5% - 2% = 2.5%). Therefore, the longer you hold off on taking withdrawals, the bigger your income payments will eventually be.

Figure 2. Annuities with a Guaranteed Minimum Income Benefit rider generally allow you to make withdrawals during the 7-10 year waiting period. However, doing so does impede the growth of your "benefit base."

: MetLife

As with GLWBs, you may have the option to step up your benefit base if your investments do well. So if your $100,000 investment shoots up to $130,000, say, some riders allow you to lock in the higher value.

Employing this feature can involve a trade-off, however. In some cases, stepping up your benefit base restarts the waiting period before you can start receiving fixed payments. Therefore, going down this path isn't right for everyone.

While guaranteed benefit riders provide a nice safety net, they do come at a cost. Usually, the fee is anywhere between 0.5% and 1.25% annually, depending on the provider.

The problem is that this cost gets added to the already steep price tag adorning most variable annuities. Total annual expenses are frequently more than 2% as is. Throw in an optional rider, and your fees can easily top 3%. That's a huge bite out of your retirement nest egg.

We haven't even discussed surrender charges yet. Should you pull your money out ahead of schedule, some contracts will penalize you up to 7% or 8% of your principal (the percentage gradually goes down during the first few years).

Thankfully, low-cost providers like Vanguard have made things a bit more palatable. The firm charges an average of 1.76% for a variable annuity with a guaranteed withdrawal benefit, which is underwritten by Transamerica Premier Life Insurance Company. Granted, it's a pretty streamlined product: Customers can choose among three portfolios, each with its own mix of stocks and bonds. But at roughly half the cost of some other insurers – not to mention the ability to lock in your account's highest value – it can seem a pretty compelling option.

For more details, see Variable Annuities With Living Benefits: Worth The Fees?

Even a relatively cheap product like Vanguard's isn't right for everyone. If you don't have to worry about outliving your savings, putting your money into straight investments, like no-load mutual funds, is still the far less expensive route. And it's generally not a good idea to put annuities into an IRA or 401(k) plan, which already offer tax-deferred growth.

But if you've maxed out your contributions to these other tax-advantaged plans and the thought of a bear market keeps you up at night, a variable annuity with income protections might just be something to consider. Especially if you can find a low-fee variety to your liking.