Variable annuities enable people to put funds into mutual funds but with insurance guarantees that protect them from some losses caused by down markets. Death benefits are among the standard guarantees that are part of all variable annuity contracts. Named contract beneficiaries receive specified payouts if the contract owner dies during the term of the contract.
Standard Death Benefit
All annuity contracts have a standard death benefit that contract owners pay for on an annual basis. The fee typically amounts to 1 percent or less of the total account value. The basic death benefit normally equals the amount of the initial premium payment used to fund the account. If the owner dies, the beneficiary receives a lump sum payment. Any withdrawals made by the contract owner plus all contract fees are deducted from the payout amount before the beneficiary receives it.
When Death Benefits Are Not Paid
Death benefits are only paid out if the contract owner dies at a time when the contract has lost value. If the annuity contract's sub-accounts, which normally contain mutual funds, have experienced growth, the beneficiary receives the account proceeds rather than just the death benefit. As with the death benefit, account payouts are adjusted to reflect fees and withdrawals made by the account holder prior to death. Account beneficiaries receive the higher of the account value or the stated death benefit.
Enhanced Death Benefits
Variable annuity contract owners can pay an additional fee called a rider to increase the standard death benefit. Enhanced riders increase the death benefit by a specified amount each year during the life of the account owner. If the owner dies, the beneficiary receives the higher of the cash value and the enhanced death benefit value. Typically, enhanced death benefits cause the death benefit to increase by 5 or 6 percent each contract year.
Downside To Death Benefits
Basic death benefit insurance premiums deplete the actual cash value of an account on an annal basis. Enhanced death benefits cost more and deplete the annuity's account value even faster. Furthermore, most death benefits only provide coverage for people below the age of 75 or 80. The death benefits are one of the key features that differentiate variable annuities from basic mutual funds. However, someone young and healthy could buy the same mutual funds in an annuity and separately buy a life insurance policy to get the same protection and possibly pay less than if he were to open a variable annuity.
Tags: death benefit, beneficiary receives, death benefit, mutual funds, owner dies, account value, contract owner
