Annuity With An Increasing Death Benefit

Annuities serve many purposes, but you might want one to safely and efficiently transfer assets to your heirs. One popular annuity feature offers an increasing death benefit to guarantee annual growth.

This rider might be appropriate for someone who does not anticipate needing their funds. Perhaps they have ample liquidity and investments elsewhere. The annuity would only be accessed in an emergency, but would otherwise grow and increase in value.

Understanding Annuity Death Benefits

First, it’s important to understand that almost all annuities offer a death benefit. Usually, it’s the accumulated contract value, and surrender penalties are usually waived at passing. That’s not the case 100% of the time, however. It’s a good idea to ask your agent about any contract you are considering.

A select few companies offer a rider that allows your death benefit to grow each year. Your account will grow for a guaranteed 10-15 years with some contracts. The growth is locked in for the life of the rider. For example, one popular annuity policy offers a 10% simple interest increase guaranteed for 15 years.

This is a smart way to lock in growth and pass wealth to your beneficiaries. You’ll always know the value of your account and you don’t have to worry about market fluctuations.

Who Might Benefit From Guaranteed Annuity Growth?

With an account like this, it’s best to set it and forget it. You may not want to take regular withdrawals unless it’s necessary. That’s not to say you can’t, but any withdrawals would reduce your death benefit. That could defeat the purpose of the rider.

Thus, this policy might not work well for an IRA account. Why? Because IRAs have Required Minimum Distributions as you get older. Those forced withdrawals would decrease the death benefit.

It’s better to use post-tax money to fund this type of annuity. These are called non-qualified annuities. You are never forced to take any withdrawals from a non-qualified account.

Our clients who are most interested in this strategy might already own a non-qualified annuity. In many cases, their existing contract hasn’t performed very well or it’s settled in at a low rate. They usually haven’t touched the investment – and don’t anticipate any regular withdrawals.

In this case, we would set up a 1035 tax-free exchange and transfer the old annuity to this new one. Any gains in the old annuity are deferred and no taxes are due. The account then rolls up at the established rate for the term of the increasing death benefit rider.

Let’s take a look at an example using a $200K deposit with a 70-year-old owner.

Outperforming The Guaranteed Value

In the above example, we used a $200K deposit for a 70 year old annuity owner and assumed no withdrawals. The annuity death benefit increases at a 10% simple interest rate guaranteed for 15 years. As of the writing of this post in October 2025, these are real numbers with an existing product. None of this is fabricated.

You can see each year how the value of the death benefit increases. Should the owner pass away in any given year, the death benefit would pass to their beneficiaries. After 15 years, you can see the annuity death benefit would be worth $480,000 on a guaranteed basis.

But this does not tell the whole story. There are guaranteed and non-guaranteed values at work here. The $480,000 assumes regular growth in the underlying investments in the annuity.

This particular indexed annuity offers several investment options. We used historically accurate data to show how the death benefit would increase assuming normal growth in a popular 2-year indexing account.

After 15 years, the annuity death benefit (and contract value) could be worth more. Assuming modest historical returns in the future, the death benefit could be over $500,000. But no matter what happens, the $480,000 is always guaranteed.

And after the 15 years is up, the death benefit can continue to increase. Most of our clients who purchase this annuity are in their 70’s. It might not make sense to purchase this at a younger age if you anticipate a full life expectancy.

You always have the guarantees to fall back on, but if the annuity performs even reasonably well, your death benefit (and contract value) will be more than the guaranteed amounts. There is little risk in investing more aggressively. Most of our clients want to maximize growth using the indexing options available to them.

What Is The Cost? What About Taxes?

This particular death benefit rider has a .50% yearly cost to the policy. If you look at the contract values in the above example, you can see they decrease each year by 50 basis points. This fee does not decrease your guaranteed death benefit, however.

It’s important to note that this is not a life insurance policy. This means, yes, taxes are do on the gains when they are withdrawn. That occurs when the owner passes away.

Only life insurance passes income tax-free to your beneficiaries. That’s why fixed and single premium life insurance policies are popular as a wealth transfer strategy. But not everyone can qualify health-wise for life insurance. An annuity policy like this one asks no health questions and has no medical underwriting.

At passing, your heirs (or the estate) would pay any income taxes due on the growth… same as all other annuities. So it’s only tax-deferred, but not tax-free. But that’s no reason not to try and grow the account as much as possible. Your beneficiaries might choose to withdraw the funds over 5 years to help reduce any income taxes owed.

Request Illustrations & Information

There’s a lot of creative ways to efficiently grow your money and transfer it to your loved ones. You could also use this to provide for a favorite charity. At Hyers and Associates, we specialize in annuity and life policies for wealth creation, tax mitigation, and asset transfer.

Contact us today to learn more about this guaranteed annuity strategy.