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 in order to guarantee growth each year.
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 almost all annuities offer a death benefit of some kind. Usually it’s the accumulated contract value – and usually surrender penalties are waived at death. That’s not the case 100% of the time, however. It’s a good idea to ask your agent just in case.
But in this low interest rate environment, some companies offer a rider that allows your death benefit to grow each year. Your account can grow for 10-15 years with some contracts. The growth would be locked in for the life of the rider. For example, one popular annuity policy is offering a 7% simple interest increase that’s guaranteed for 15 years.
This is a very 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 absolutely 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 usually 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 rider.