There are a number of different annuity options for investors, and the death benefit feature will vary from annuity type to annuity type, depending on which kind you purchase.
Immediate Annuities
Immediate annuities are those that pay out instantly from the time you sign the paperwork and hand over your investment. In an immediate annuity, the death benefit allows the money still in an annuity to be handed over to a beneficiary if the purchaser dies before receiving the full contract value of the stated annuity. So, if you were to buy an annuity with a contract value of $50,000, and die after receiving just $40,000 in benefits, the beneficiary you picked when signing the deal would receive the extra $10,000.
Deferred annuities are those in which the contract funds generate an interest return, but the purchaser does not receive payments immediately. Often, these are purchased long before the purchaser decides to retire at which point they can slowly add funds to save up, and earn a nice capital appreciation, before regular disbursements are received.
The death benefit in the case of a deferred annuity is generally equal to the money left in the contract as well as interest accrued up until the purchasers death.
You Should Know About Riders
Annuities are a lot like buying a car. Really? Yep. When buying an annuity you can add on all kinds of upgrades called “riders” just like you could add seat warmers and premium headlights to a brand new car.
When shopping around for an annuity, you’ll generally shop for the most basic elements, ie the payment structure, and type of annuity you would like to buy.
After selecting an annuity you’ll have the option to purchase a “rider” or an option on annuity. Riders can vary from insurance protection on your annuity, to an additional death benefit as part of your investment. For instance, you could purchase a $10,000 annuity with a “rider” for $2000 that would allow you to receive a larger death benefit of say, $5,000.
Including a death benefit as part of a rider is a very popular option among annuity investors because they can not only plan for their costs in retirement, but also allow for a lump sum payment to be made at the time of death to cover funeral and other expenses. Talk about an easy way to go!
Adding a rider is done during the “underwriting” stage where the insurance company decides how risky a certain annuity will be for itself. They include things like age, lifestyle, current health conditions and even your credit report to determine how much of a risk you are, and how they will have to price the annuity in order for them to make money. Underwriting frequently becomes more complex as riders are added to the contract, but for many small annuity purchases it amounts to just a tiny step before the cake walk. For larger, more complex annuities, the underwriting process can take more time.
