When people think of annuities, they often focus on their ability to provide steady income or potential for growth, especially during retirement. However, one aspect of annuities that is often overlooked is their role in wealth transfer. Annuities can be a powerful tool not only for income generation but also for passing on wealth to beneficiaries.

While annuities are commonly seen as tax-efficient retirement income solutions, they also offer a form of protection in the event of the annuity holder’s death. Many people mistakenly believe that the value of their annuity vanishes upon their passing, or that it is automatically forfeited to the insurance company. However, depending on the type of annuity, the value may be passed on to a beneficiary. Understanding how annuity death benefits work is key to leveraging them effectively.

Annuities can be structured to ensure that their value is preserved for beneficiaries, even if the unexpected occurs. The death benefit options available will depend on whether the annuity is in the accumulation phase or the payout (annuity) phase. Below are some common types of death benefits associated with annuities.

Common Annuity Death Benefits

1. Standard Death Benefit: This is the most basic option. It provides the current value of the annuity contract to the beneficiary upon the annuitant’s death.
2. Return of Purchase Payment Death Benefit: With this option, the beneficiary receives either the contract value or the total of the purchase payments minus withdrawals, whichever is greater. This ensures that the beneficiary is not left with less than the amount originally invested.
3. Guaranteed Increase Benefit: This option provides a predetermined death benefit amount that grows over time, based on factors determined by the insurer. The beneficiary can receive either the original value or the increased amount, whichever is higher. However, this enhanced benefit cannot be withdrawn during the contract holder’s lifetime.
4. Step-Up Death Benefit: Also called the Highest Anniversary Death Benefit (HAV) or Highest Quarterly Anniversary Death Benefit, this option allows the death benefit to increase if the annuity’s contract value exceeds its current death benefit on the contract anniversary. This feature ensures that the beneficiary receives the highest possible value.
5. Spousal Continuance: This provision allows a surviving spouse to take over the annuity after the death of the original owner. The spouse continues to enjoy the annuity’s benefits, such as potential growth or income payments, as if they had been the original owner. This option is typically available if the spouse is the primary beneficiary.

Important Considerations

The death benefit options available in an annuity can vary depending on the type of annuity, the insurer, the length of time between the purchase and death, and other factors like withdrawals taken. Understanding these factors is crucial in determining the best annuity for your needs. Annuities can seem complicated, and the nuances of each option can be difficult to navigate.

In addition to annuities, there are other tools for wealth transfer, such as wills, trusts, life insurance policies, and gifts. Each of these comes with its own rules and regulations, and it’s essential to carefully consider the best approach for passing on your wealth.

Consulting with a financial professional can help clarify the details of annuities and other wealth transfer strategies, ensuring that your wealth is protected and passed on according to your wishes.