Introduction
An annuity is an insurance contract between the annuitant (buyer) and an insurance company. In exchange for a lump sum or a series of payments, the company promises to provide you with a steady stream of income either immediately or at some point in the future. The security of this steady stream of income can form a solid foundation for a retirement alongside other streams such as Social Security or any pensions. These contracts can be made for a set period of time or for life. But what happens when the annuitant dies prior to the contract expiration?
Key Terms
Annuitant: The owner(s) of the annuity contract.
Beneficiary: The person or institution designated by the annuitant, in the terms of the contract, who will receive any death benefits, if applicable.
Rider: An annuity rider is a feature that can be added to an annuity contract to provide additional benefits or options to the annuity holder.
Death Rider
Many annuities offer riders that can be purchased for a fee. These riders provide additional benefits depending on the annuitants’ personal circumstances. Many insurance companies offer what’s called a death rider. These may be in the form of a lump sum payment or a series of payments. The most popular type of death rider is the Guaranteed Death Benefit. If the owner of an annuity were to pass away prior to the end of the contract, the beneficiary will receive the value of the annuity contract regardless of the annuity’s performance.
Enhanced benefit riders can oftentimes be included in the contract to ensure beneficiaries receive a greater value than the account value by assuming a hypothetical rate of growth. These riders can also include an interest bonus to the contract at the time of death or ensure the death benefit is calculated based off the highest recorded value of the contract.
Death Benefits Also Depend on the Type of Annuity
If a rider is not an option with a plan or not preferred, there are still several ways that annuities can be paid out after the annuitant’s death. Below is a table summarizing information from Investopedia. As you can see, there are quite a few factors involved in determining what happens to an annuity after the annuitant’s death.
| Type | Time of Death | Benefit (depending on plan provisions/riders) |
|---|---|---|
Fixed Period | Prior to contract termination | Remaining benefits paid to beneficiary |
After account exhaustion or fixed period | No further payments guaranteed, unless provision made for beneficiary to continue to receive payments for a period or until account depletion. | |
Life | Accumulation phase | Typically lump-sum payment, size depending on provisions. |
Joint-life | Any time during contract | Upon a spouse’s death the payments will continue with the surviving spouse until death. |
Life with period certain | Any time during contract and within specified period |
Concluding Considerations
It is important to remember a few things regarding death benefits/payouts for annuities.
The annuitant must designate a beneficiary. To ensure a seamless transition after death, it is important to designate a beneficiary so that proceeds may pass directly to that beneficiary.
It is important to understand the terms of the contract to ensure the annuitant understands who is receiving the benefit and to what extent and for what period of time.
It is also important to understand what penalties, fees and/or taxes may apply at the time of the annuitant’s death.
It is certainly recommended to talk with a trusted financial/retirement advisor/planner when purchasing an annuity. With these things in mind, you will ensure that the legacy you plan on leaving will be a blessing and not a burden on those left behind.