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 www.VariableAnnuitiesFYI.com.