Death Benefits In A Variable Annuity
- Death Benefits: The basic death benefit offered by a variable annuity is a guarantee that upon your death the insurance company will pay out at least the amount you put it in. Doesn’t sound like much of a benefit, does it?
The purpose: If you invest in a variable annuity, and the investments go down in value, you can be assured that upon your death your beneficiary will receive at least the original amount you contributed.
Most variable annuity policies also have features called “riders” that you can add to your policy.
Death benefit riders offer options like monthly or annual “step ups”. If the policy has a monthly step-up, then each month, on your policy anniversary date, the insurance company takes a snapshot of your account value. The highest monthly value is recorded and is used as the death benefit amount.
These death benefit riders cost more than the basic death benefit. A death benefit rider that has a monthly step-up may cost anywhere from .25% - .50% per month. A cost of one half of one percent a year adds up when charged year after year.
Death benefit riders that offer monthly or annual step ups can provide a way for you to lock in market gains to pass along to your heirs. If you cannot qualify for life insurance, and do not need to use the funds yourself, this can be a way to provide an extra benefit for beneficiaries, although the gain may not be passed along in as tax efficient a way as other alternatives.
Living Benefits In A Variable Annuity
- Living Benefits: Variable annuities offer additional riders, called living benefits. A living benefit may provide for a minimum guaranteed return, or a minimum lifetime withdrawal amount.
Have caution: To exercise these features, the annuity may require that you annuitize your policy (which simply means you would turn it into an immediate annuity), or you may be required to own the policy for a minimum number of years before the rider is effective. I have also seen cases where annuity owners mistakenly thought their account value was guaranteed to grow at a minimum rate, which is usually not the case; instead it is typically a future level of income that is being guaranteed. Be sure to ask plenty of questions and get clear answers.
The purpose: A living benefit rider is intended to provide you with a safety net; a way of insuring your retirement income will be there when you need it. Like any form of insurance, there is a cost; typically in the range of .25% to 1.00% a year, which is in addition to the other fees and expenses inside the annuity.
Living benefits can be a great feature but you must make sure you understand what requirements you must meet to use them. How long do you have to own the policy? Are you required to annuitize the contract to use the benefit? Do not buy a policy with a living benefit until you understand how the benefit works, and when you can use it.
