Death Benefits – Annuity Guarantees

Annuity death benefits are promises to pay something to your beneficiaries.

When you invest in an annuity, the account value may decline if the investments inside lose value. What happens if you die while the account value is down?

It depends on what type of death benefit the annuity offers.

Note: this is part of a series on annuity guarantees.

Some annuities have special death benefits that promise to return your original investment amount (or “premium”) – even if the investments lost money since you started. Others take a periodic snapshot (every quarter or year, for example) and you lock in a “high-water mark” if the account value is higher than it was at the previous snapshot. If you die, you get the highest anniversary value.

Of course, some annuities don’t offer any of these features; you’ll have to look closely to see what each product can do and how to choose death benefit options. There are a million varieties, so read your prospectus carefully.

Drawbacks of Annuity Death Benefits

Death benefits can be valuable, especially if you pass away while markets are down. However, there are some drawbacks.

Death benefit options may cost extra, so your investments have to work harder to grow. The cost may be worth it to you, but you should be aware of the costs and tradeoffs.

The death benefit may also be taxable. When you use pure life insurance, the death benefit is generally tax-free to beneficiaries (but you should always check with a CPA just to be sure). Annuity death benefits are different. The entire amount or just some portion may be taxed, so you might not be able to spend 100% of the death benefit.

Finally, death benefit guarantees are only as strong as the insurance company. If the company goes under, you may not get what you expected. Stick with strong conservative annuity providers to improve your chances.