Annuities are a type of insurance contract that focuses on growing your assets and helping to provide a guaranteed income. Some contracts also include a death benefit for any annuity value that is not paid out during your lifetime.
Here is a look at how annuity death benefits work and when choosing an annuity with a death benefit may make sense.
How Annuity Death Benefits Work
When a death claim occurs, annuities usually pay a death benefit to a beneficiary named in the contract. Naming a beneficiary other than your estate can help the process move more smoothly and help the proceeds go directly to the intended person instead of going through probate.
When present, a death benefit is automatically included with your contract. Depending on the type of annuity you purchase, you may be able to add enhanced death benefits and features. These add-ons may come with extra costs or fees.
Options for Annuity Death Benefits
You may be able to choose from several types of annuity death benefits, depending on your contract and insurer. Here are some common options.
Standard Death Benefit
The simplest option is a standard death benefit that pays the annuity’s contract value to a beneficiary. The beneficiary receives the current account value, whether it has increased or decreased since it was issued.
Return of Premium
Some contracts provide a death benefit that returns either your account value or your initial premium, whichever is greater, minus any withdrawals or fees. This type of death benefit applies regardless of how your annuity performs, which may help if your account value declines.
Stepped-Up Benefit
Another type of benefit tracks your account balance over time by setting a high-water mark. This is the highest value your account reaches. The insurer then pays a death benefit equal to the greater of the current account value or the last recorded high-water mark. Withdrawals and fees may reduce the final amount paid.
Guaranteed Increase
Some annuities increase your initial investment by a set percentage each year, such as 3 percent, for the purpose of calculating the death benefit. Beneficiaries receive either the actual account value or the increased amount, whichever is higher.
Immediate Annuities
If you purchase an immediate annuity that provides a guaranteed income stream, you may want to consider a refund option or a period certain option. These options allow beneficiaries to receive remaining payments if you pass away before the payout period ends. For example, if you select a 10-year payout and pass away early, the remaining payments go to your beneficiary.
How Can Annuity Death Benefits Potentially Help?
An annuity death benefit can be useful in several situations:
- To Simplify the Transfer Process: Avoiding probate can help beneficiaries receive funds more quickly and keep the transfer private.
- To Address Timing Risk: A refund or period certain option on an immediate annuity can help if death occurs shortly after income payments begin.
- Tax Considerations: Life insurance proceeds are often paid without income tax, but annuity death benefits may be taxable. The exact tax treatment depends on your situation, so it may help to speak with a tax professional to understand what to expect.
Conclusion
Annuities often offer death benefits that provide streamlined payments to beneficiaries. You can typically choose from several options, and it's worth exploring all of the alternatives. Choose an annuity that functions in the way that best helps you and your family.
