Variable Annuity Death Benefits

In looking at variable annuity death benefits we should first do a review of what a variable annuity is.  A variable annuity is a contract that a person purchases from an insurance company.  The insurance company in effect promises to pay you periodic payments for the rest of your life starting immediately or at some future date.  In the interim you can invest the money in mutual funds that will grow tax-deferred until you start to take distributions. 

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Variable Annuity Advantages

Variable annuities will be invested in vehicles that will be affected by the ups and downs in the stock and bond markets.  This can be an advantage if the markets climb and a disadvantage if they drop.  One benefit is that if the value of the annuity contract drops because of the market movements, if you die before payments start, your beneficiaries will normally receive at least a death benefit equal to the amount you started with.  There is an expense built into the annuity fees to cover this feature.

If your annuity account value is higher than the amount you deposited and you have not started receiving income benefits, your heirs will receive the account value if you die.  So, it is either the account value or the amount you started with, whichever is higher.

Step-up Death Benefits on Variable Annuity Contracts

Most variable annuities offer riders that allow you to step-up the death benefit on the contract anniversary date.  This means that on the anniversary date the insurance company will look back over the last 12 month period and find the highest monthly amount.  They will then lock in this new amount as the new death benefit.

For example, if you deposit $200,000 into a variable annuity that has a step-up rider and at the end of the first year the account value has gone up to $265,000, then the new death benefit is locked in at $265,000.  Even if the market drops the following year and the contract value decreased to $170,000 your step-up death benefit remains at $265,000. 

This is a good benefit to have if you have a growing family and the markets are increasing.  Prices typically don’t go down over time, so this gives you a way to increase your family’s future financial security.  This feature is also very helpful if you are not insurable through a regular life insurance policy.  The gains on a step-up benefit may be taxed on receipt as well.

Variable Annuity Benefits Passed on by way of Joint Life Option

At the time of retirement you can choice to annuitize the payments from your contract.  If you are married you can use the joint life payment option.  This means that you and your spouse will receive monthly income based on the mortality table for both your lives.  In other words, the income stream will be paid while either one of you is live.  The payments you receive from the annuity will be smaller each month or year because of this option, but you can be assured that if you die and your spouse lives for 20 more years that they will receive the continued payments until they die. 

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Use Period Certain Payments to Insure Death Benefits to Your Heirs

If you have a variable annuity that is in your name only, when you get to retirement age, you may want to annuitize the contract with a period certain option.  This means that the annuity will pay you a set income for as long as you live, even if you outlive the money that is in your account.  However, if you die for example in the first year after starting benefits and you have a period certain of 20 years on your contract, your beneficiaries will receive monthly or annual benefits for the remaining 19 years.  After that the contract is over.

If you are single and you annuitize with just a monthly income for life and no death benefits, you will receive a higher monthly payment, but if you die in the first or second year, the insurance company will not pay any benefits to your heirs.  They will keep the remainder of your money.

Receiving Lifetime Payments and Death Benefits from a Variable Annuity

When you are purchasing a single life variable annuity, you can attach a rider that adds a living benefit that makes sure that no matter what happens in the stock market and to the value of your account, you are guaranteed a certain annual return on your income base.

This means that you don’t have to annuitize when you retire, you can just start taking an income from you account based on the market value of your account or your income base whichever is higher and you still maintain control of your money.  If you die, at least your heirs will receive what you put into the account.  If you have made gains, then they will have even more benefits.


In conclusion, you will probably be better off if you have both a step-up death benefit so your heirs will have future benefits as well as a living benefit to protect your retirement benefits.  Both of these features have a cost though.  Before adding them to your contract you should find out how much they will cost.  Once you have all the information in front of you, you can make a much more informed decision about what to include. 

Again, if you can’t get life insurance for medical reasons, having the step-up benefit will be even more beneficial.  Making sure that you have living benefits though is the main reason for purchasing an annuity.  It is a way to guarantee you cannot outlive your retirement income.

The death benefits are a secondary benefit, but you should make sure that you understand all the options available to you because these benefits may change in importance as time passes and you want to make sure that you and your family are taken care of.

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