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wiseGEEK: What is an Annuity Death Benefit?

An annuity is a contract, usually between an insurance company and the contract owner. The person who will receive annuity payments is called the annuitant. The owner and annuitant can be the same person. An annuity provides payments to the annuitant during the annuitant’s lifetime. If the annuitant dies before the full contract value is paid out, an annuity death benefit may be paid to a beneficiary who is named in the contract.

There are various types of annuities and the annuity death benefit works differently depending on which kind of contract it is. Generally, annuities are either fixed or deferred. With immediate annuities. the annuitant starts receiving contract payments immediately. If the annuitant dies before the full contract value is paid out, the beneficiary usually receives any remaining money. To calculate the value of the annuity death benefit, interest is accrued until the date of the annuitant’s death.

If an annuity is deferred, the contract funds earn interest, but payments do not start immediately. Payments begin on a specific start date noted in the contract. Payments generally begin after a set number of years, called the deferral period. The annuitant receives payments based on the amount of interest earned during the deferral period. This is called the payout, or income, period.

There are generally two types of deferred annuities, fixed and variable. A fixed annuity earns a

set interest rate guaranteed in the contract. This rate is determined by the insurance company for the entire contract. As a result, the payments and annuity death benefit may not keep pace with inflation.

In variable annuities, contract funds are invested in different sub-accounts that are tied to the stock market. Payments and death benefits have a better chance of keeping up with inflation than they would in a fixed annuity. A major downside is that it is possible to lose money if the stocks tied to the sub-accounts lose value. Interest and the initial amount invested in the annuity can be lost.

The death benefit for deferred annuities is usually equal to any money left in the contract, plus the interest accrued up until the annuitant’s death. For all types of annuities, contract add-ons, called riders, can be purchased to increase the death benefit. Riders can have set fees or the fees can be determined by a process called underwriting .

Underwriting is the way the insurance company issuing an annuity determines how risky it is to insure the annuitant’s life. Underwriting can include a review of the annuitant’s health and lifestyle. This review can include medical tests, a credit check, and interviews with the annuitant’s employer, family, and friends. Usually, the higher the annuity death benefit, the more detailed the underwriting will be.

Category: Bank

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