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Annuity Death Benefits – What You Need to Know

What happens to your annuity when you die? Do you get to pass along the value of the annuity to your children or heirs? In most cases the answer is yes, but with two major caveats.

Fixed and Fixed Indexed Annuities paying “lifetime income” benefits generally do not provide an inheritance unless they specifically specify otherwise. In the cases where they do provide an inheritance, there is a guarantee of a minimum number of payments. Any payments that are not distributed to you below the minimum before you die, will go your heirs.

Variable Annuities will always provide for inheritance unless the value of the annuity is zero. As you start receiving payments from a variable annuity, you lower the value of the annuity by the amount you withdraw. If the annuity has no value, there will be nothing for your heirs to inherit.

How much will your heirs inherit?

annuity death benifitsWith a fixed deferred annuity, the answer is very simple. The present value of the annuity. However, the answer becomes more complicated with index and variable annuities. Here are some of the major type of annuity death benefits with these types of annuities.

  • Standard death benefit, which is defined as the current value of the annuity; this value may be fixed when the insurance company receives proof of the death of the owner or the annuitant, or it may continue to change until the beneficiary makes a claim
  • Return of Premium death benefit, being the greater of the premium paid or the current value of the annuity, less any withdrawals or fees
  • Stepped-up death benefit: the balance of the annuity contract is recorded the year after the purchase date and each year after that. The death benefit is then determined by the highest value of those different anniversary values, minus any fees concerned or withdrawals.

A beneficiary may have different options for accepting a death benefit. These options include payment of a lump sum, regular income payments, deferral of receiving the death benefit, or taking over ownership of the annuity contract (for example, as a spouse).

This lesson is part of our Free Guide to Investing in Annuities.  Continue to the next lesson here.

 

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David Waring

David Waring was the founder of LearnBonds.com and has been a major contributor to the extensive library of investing news and information available on the site. Until the launch of Learnbonds.com in late 2011 there was no single site on the internet catering exclusively to the individual bond investor. This was true even though more individuals own stocks than bonds. Learn Bonds was launched to fill that gap.