In response to market demand, several insurance companies are offering annuity accounts with a guaranteed death benefit rider. These new riders increase the contract value each year by a guaranteed interest rate.
The annuity death benefit proceeds will be passed on to the insured’s beneficiary(s) in a lump sum – or over the course of a predetermined number of years. Those who are looking to lock-in gains and transfer wealth might consider an annuity death benefit rider.
These riders simply guarantee a yearly increase in the annuity death benefit amount each year for a certain time period.
A common rider would increase the account value each year by 5% for a set number of years (usually ten).
Some companies allow the insured to re-up the rider for another ten years, but most contracts stop rolling up once the annuity owner turns age 85. Each policy is a little different.
The death benefit rider will not change once it has been added to the contract. The annual roll-up will not increase or decrease for the ten year period. The cost (if there is one) stays the same as well. After the ten year term, the annuity owner can decide to re-up once the new rates are established.
Upon the death of the insured/annuitant, the insurance company pays the contract beneficiary(s) the death benefit amount either in a lump sum or over a set number of years. Usually the minimum number of years needed to access the total benefit is 5 years.
In some cases, the annuity beneficiaries will have a choice. They can take a smaller sum all at once – or a larger sum over 5 years. Annuity owners who are looking to transfer wealth over a period of time might deliberately establish a 5 year payout for the next generation. This can be an advantageous strategy with accounts that have not yet been taxed – like IRA’s.
If the annuity owner passes away before the ten year term has been completed, then the death benefit would only be calculated for the time the contract was in force – not the entire ten year term.
These riders usually have an annual cost to the contract itself, but this cost does not lower the amount payable at death. Depending on the insurance company and the rider chosen, an average annual cost for a death benefit rider would be in the .70% – 1.10% range.
The annual cost means there are two accounts at work. The first is the walk-away value of the contract. The walk-away value is the amount payable to the insured if s/he surrenders the contract for some reason. The annuity death benefit rider will decrease the walk-away/surrender value each year should the owner cash-in or transfer the annuity.
The second value is the death benefit amount. This value compounds each year and is payable at death. Again, some annuities will offer this value in a lump sum while other accounts will require a 5 year payout.
The two values (walk-away & death benefit) will almost always be different. It is likely that the death benefit amount would be larger in the long run because there are no market risks, fluctuating interest rates, or annual costs to stunt its growth.
In some cases, annuity death benefit riders are packaged with an income rider. This offers annuity owners more flexibility as they can access the death benefit value (if needed) by creating a lifetime income stream.
In many cases, the lifetime income stream might be the primary reason the rider was purchased. The increasing death benefit is a desirable feature, but guaranteed lifetime income during retirement might be the primary goal for some retirees.
This acknowledges the fact that annuities are not the most efficient investment for wealth transfer; that vehicle is life insurance. Life insurance is far and away the most efficient product for creating and transferring wealth on a tax-free basis. Readers can learn more about the use of life insurance for wealth transfer here.
Fixed and indexed annuities offering an increasing death benefit can be a valuable feature for those looking to guarantee yearly gains, establish a lifetime income stream or pass an existing tax-deferred asset to the next generation.
At Hyers and Associates, we recognize that one size does not fit all when it comes to insurance and investment planning. Our independence allows us to help our clients find the most suitable products that best fit their long term needs and goals.