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What are the primary features of variable annuities?
The large number of variable annuity products on the market today can make understanding them difficult. But in fact, there are only a handful of different types of variable annuities, and we will help you find the best types to suit your needs. First, let’s discuss the two primary features of variable annuities:
Living Benefit
One special type of variable annuity is the living benefit annuity, also known as a GRIB (Guaranteed Retirement Income Benefit) or GRIP (Guaranteed Retirement Income Program). The best living benefit annuities guarantee at least a 5% return over seven years, or the highest attained value on each anniversary during the surrender period, whichever is greater. In exchange for this living guarantee, the living benefit annuity typically has a 7-year surrender charge, no upfront bonus, and a slightly higher annual fee (.25% to .50% per year).
Death Benefit
Another important feature of some annuities is the death benefit provision. The annuity issuer guarantees at a minimum that upon your death your total premiums invested are paid to your beneficiaries. Many annuities “step-up” on the anniversary of the date the annuity was purchased, to the highest value at any preceding anniversary; or guarantee a minimum 5% to 7% interest compounded annually, whichever is greater. Some variable annuities now even offer a combination of the aforementioned benefits, i.e. the greater of 5% or 7% compounded annually, the highest contract anniversary or the actual account value on death to the heirs (see death benefits under compare annuities for more detailed information). For example, assume you invest $10,000 in a variable annuity with an annual step-up, and over the next several years your contract grows to $40,000 on its anniversary. Now assume that the market goes down and your value drops to $25,000, and just as you thought things couldn’t get any worse , you die. In this hypothetical scenario your heirs would receive the the highest contract anniversary of $40,000.
The enhanced death benefit options offered by insurance companies come at an additional expense, typically ranging from 0.05% to 0.50% on top of the regular annual expenses. Furthermore unlike a death benefit from a life insurance policy, the death benefit associated with an annuity does not transfer to the beneficiaries income tax free. That said, you don’t have to qualify for the annuity death benefit either.
