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Variable Annuities: Death Benefits and other Options

By Compuquotes Team on September 16th, 2008
Annuity

A variable annuity constitutes a contract between you and an insurance company. Under the terms of the contract, the insurer will make you periodic payments, usually starting at some date in the future. Variable annuities offer some additional advantages over fixed annuities, one of which is that the variable annuity has what is called a death benefit. Other optional extras include a guaranteed minimum income benefit.

Don't forget that each additional benefit costs extra-make sure you understand what you're getting for the extra money you'll pay so you can make an informed decision.

The Death Benefit

Essentially, the addition of the death benefit means that if you die before your insurer starts making annuity payments, your named beneficiary will receive a sum of money. These are common features of variable annuities.

The death benefit option allows you to nominate a beneficiary to receive a lump sum payment if you die. The payment is usually either the total amount of money in your account, or a guaranteed minimum amount as stipulated by your contract, whichever is greater.

Let's say, for example, that your variable annuity has a death benefit that is equal to the greater of your account value or your total payments minus withdrawals (the guaranteed minimum). Your purchase payments total $40,000 and you've withdrawn a total of $5,000, so your payments minus withdrawals value is $35,000. However, your account has also suffered some investment losses, so it is currently valued at $30,000. Your nominated beneficiary will receive a total of $35,000, as it is the greater of the two values.

Some policies may allow you to choose a death benefit that offers an additional payout by allowing you to �lock in' a higher account value. For example, your guaranteed minimum might be the value your account held on a certain date. This figure might turn out to be higher than your payments minus withdrawals value in certain situations, allowing your beneficiary to benefit from a larger lump sum. As with all other extras, the improved death benefit will reduce the value of your account, due to higher fees.

Guaranteed Minimum Income Benefit

A guaranteed minimum income benefit is another optional extra (that incurs extra charges) that you can add to your annuity to provide some additional protection. This benefit provides you with a guaranteed level of income regardless of your account status. This means that if investment losses or other factors reduce the value of your account, you'll still be able to receive a certain guaranteed level of payment. Essentially, you are guaranteed a certain income regardless of your account status.

When choosing additional extras such as the guaranteed minimum income benefit, it's a good idea to consider the reputation of the company you're buying from. If you want a guaranteed minimum income, buy from an insurance company with a strong financial record and a good rating, as the company's financial strength may affect their ability to pay benefits that exceed the value of your account.

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