Death Benefits and Your Annuity

An annuity is a contract between you (the “annuitant”) and an insurance company. You purchase an annuity contract either with a lump sum payment all at once, or with many smaller payments over time. The insurance company invests your payment, and promises to provide you income over a fixed period, which may include the rest of your life. Some annuities include provisions for payments to continue after you die, to support a surviving spouse or heirs. Your annuity contract will govern death benefits and your annuity, so be sure to ask questions and read all terms of the contract.

Select a Beneficiary

If money remains in your annuity when you die, it will revert to the insurance company unless you define a beneficiary in the contract. Naming a beneficiary may speed distribution to the intended person or trust, rather than having the remaining assets go to the estate and be subject to probate. Payments to a beneficiary from earnings on an annuity are taxable, but tax treatment may be different depending on whether the beneficiary is a surviving spouse or another person.

Minimize or Eliminate Taxes on Your Retirement Funds

Speak with a financial planner and insurance professional.

Payout Options

Annuity contracts may offer several different options for how payments will transfer to a beneficiary. These include:

  • Standard Death Benefit: the value of the contract, minus fees, and withdrawals, on the day the death is reported to the insurance company. If the market is down that day, this could reduce the value of the annuity.
  • Return of Premium: this option pays the beneficiary the original cost of the annuity, or its current value, whichever is greater, less withdrawals and fees. If the annuity has suffered losses, this option may provide a better payout because the original cost is fixed.
  • Stepped Up Benefit: the greater of the current value or the highest value the account reached within a specified time (over the past year, for example).
  • Period Certain: the contract defines a number of years payments will be made, and if the annuitant dies before that time expires, payments go to the beneficiary until the time expires.
  • Life Annuity: payments for the life of the annuitant; if the annuitant dies while the account is still in the “accumulation” phase, the beneficiary might receive the greater of the total premiums paid, or the current value of the account.
  • Joint Life Payouts: payments continue for the life of the annuitant and the annuitant’s spouse, regardless of which partner passes away first.

There are many other options that insurance companies may offer in annuity contracts. Some are available only as “riders” to the contract, for an additional fee. Options may differ depending on whether your contract is for a fixed or variable annuity. If you’re asking yourself, “do I need an annuity?”, consult your financial and tax advisors to discuss all the options for annuities and their death benefits.

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