What is a Death Benefit?
Another important feature of some annuities is the death benefit provision◊. The annuity issuer guarantees,* at a minimum, that upon your death the total amount of your premiums are paid to your beneficiaries. The annuity may also offer an increased payment that includes interest earned as part of the death benefit. However, if the annuity-owner has taken excess withdrawals or had payouts that equal or exceed the initial premium payment, the death benefit will be reduced or depleted.
Death benefit provisions are a great way to protect your funds for your beneficiaries in the event of your passing. They come standard on most annuities but you can also buy enhanced benefits as well to secure greater protection. These riders are often used when the health of the owner is unsure or to grow the assets for their heirs. These work as a nice alternative for someone that is uninsurable and wants to maximize protected growth for their beneficiaries.
Death Benefit Provision
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 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.
To make certain that you fully understand the death benefit option, and pick the very best one for you and your family, contact an licensed financial professional.
For more information on death benefits and other variable annuity features, see Variable Annuities.
Criteria for Evaluating Death Benefit Annuities
When evaluating the numerous death benefit annuity riders on the market, Annuity FYI looks for a) features of the rider itself; b) the quality of the core annuities to which the rider may be applied; and c) the company issuing the annuity.
Criteria we use in evaluating the rider are:
- High compounded guaranteed roll-up rate — we generally prefer to see a roll-up rate from 5-7%.
- High age cap — up to age 80 at a minimum.
- High cap amount, or no cap. We generally prefer caps of at least 3x premium, however cap amounts affect younger investors more so than older investors.
- Availability of an Enhanced Estate Benefit (typically an extra 25% – 40% of the account value, and in some cases the greater of the account value or the roll-up, paid to the beneficiaries upon death of the annuitant and/or the owner).
- Rider fees.
- Ability to reset your riders to the highest anniversary value when your actual account performance exceeds the guarantee.
- A plan that allows resets to advanced ages (we generally favor plans that will allow resets until age 85+).
Criteria we use in evaluating the core annuities are:
- Outstanding additional features and benefits, including but not limited to living income benefits and enhanced death and estate benefits.
- Competitive annuitization factors and actuarial tables during payout phase. This translates into a larger lifetime income stream if you annuitize, for up to two people (husband and wife).
- M&E and Admin fees — we generally favor annuities with MEA fees of 1.15% or less.
- Sub-accounts and asset allocation models with strong historical returns that we believe will have strong future performance.
- Turn-key asset allocation models to meet investor profiles ranging from conservative to aggressive, with active rebalancing.
- A large selection of fund sub-accounts and the ability to invest outside of a model.
- Length of surrender period — we generally favor annuities with surrender periods of 6 years or less.
- Plans with generous penalty-free withdrawal provisions that won’t violate the riders.
Criteria we use in evaluating the insurance company issuing the annuities and riders are:
- High safety ratings of the issuing company (although with variable annuities your assets are held separately from the insurance company’s general accounts, the features and benefits are based on the claims-paying ability of the issuing company and its re-insurers).
- Company management, customer service, and ease of account access.