What is the function of an inflation rider in annuity contracts?

An inflation rider is designed to increase the periodic payments of an annuity over time, specifically to help offset the effects of inflation. As the cost of living rises, the purchasing power of fixed payments can diminish, making it crucial for annuity holders to ensure that their income keeps pace with inflation. By incorporating an inflation rider into an annuity contract, policyholders can receive adjustments to their payments, typically on a regular basis, ensuring that their income maintains its value over the years. This feature is especially valuable for individuals who anticipate needing their income to last throughout their lifetime, as it provides a safeguard against the erosion of purchasing power that results from inflation.

In contrast, the other options do not accurately reflect the function of an inflation rider. An initial lump sum payment relates to the funding aspect of an annuity, and tax liabilities pertain to the investment's tax treatment rather than the adjustments for inflation. Guaranteeing returns regardless of market conditions involves elements of risk management and investment stability rather than addressing changes in payment values due to inflation.