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When people think about what an annuity can do for them, they generally think about income options and growth potential rather than bequeathing wealth. But an annuity can be a package that can consider both.
Indeed, annuities can be very powerful, tax efficient tools when it comes to managing income in retirement. Through providing a series of annuity payments for life or a period of time, annuities specialize in providing guaranteed income.
But in certain circumstances, annuities can also have the protection of passing on the value to a beneficiary should the unforeseen occur. Many people misunderstand this, probably due to the sometimes-complicated nature of annuities. People may think that the value of an annuity can vanish or is taken by insurance companies once the owner passes on as a matter of course. But, depending on the type of annuity involved, that may not be the case. (Related: Annuity misconceptions)
Many annuities have death benefits that not only ensure that their contract value remains available should the owner pass on, but they also offer ways of passing that money to a beneficiary. The death benefit options available depend on whether you are in the accumulation or annuity phase of your contract. (Related: What is annuitization?)
Listed below are some common death benefits. Some come with an additional cost during the accumulation phase. The death benefit during the annuity phase is driven by the annuity option you elect.
"Annuities can be a valuable tool in allowing your beneficiaries unencumbered access to their portion of assets in the event of your passing,” said Michael Duffy, a product management consultant with MassMutual. “The guaranteed death benefits available with many annuities can also provide investors greater confidence that their wealth can be transferred even in the event of market uncertainty."
Here are some of the most common beneficiary options in the annuity space:
- Standard Death Benefit. This is the most common and basic option. It provides the current value of your contract to be paid out to your listed beneficiary.
- Return of Purchase Payment Death Benefit. This provides to the beneficiary either the contract value or the total purchase payments minus withdrawals made into the contract, whichever is greater.
- Guaranteed Increase Benefit. A predetermined amount of money is decided upon when the contract starts but grows based on factors determined by the insurer. The beneficiary commonly has the choice of receiving this increased value or the original value, whichever is higher. The value of such enhanced death benefits cannot be withdrawn.
- Step-Up Death Benefit. (Also called a Highest Anniversary Death Benefit (HAV) or a Highest Quarterly Anniversary Death Benefit) Certain annuities can grow their contract value in a number of ways, such as being tied to market performance or having a fixed interest rate. In some instances, should the contract value exceed the current death benefit value, usually on the contract anniversary, the value of the death benefit would go up to the higher amount.
- Spousal Continuance. This provision provides for a surviving spouse to become the new owner of an annuity after their partner-owner's death. This continues the annuity's benefits, like growth potential or annuity payments, as if the spouse had always been the owner. This option is typically available if the spouse is the sole primary beneficiary.
Annuity contracts, on their face, can be intimidating. The type of annuity, the amount of time between purchasing the annuity and death, the value of the contract itself, the age of the beneficiaries, whether you’ve taken withdrawals, and more, can operate differently between insurers and products, and can alter the value of any offered beneficiary options. (Related: Different types of annuities explained)
Indeed, beyond annuities — whether it’s wills, trusts, life insurance policies, or gifts — there are many ways to ensure that the wealth one has spent their lifetime building ends up in the right hands. Each vehicle, however, comes with its own unique set of rules and regulations. Those more reluctant about asking for financial help from professionals may be left to come to their own conclusions about certain methods, which can come with their own set of unique misconceptions.
That’s why it’s important to go over with your financial professional the ins and outs of what they can offer to gain more clarity on what these tools are doing and where your wealth is going.
Discover more from MassMutual …
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