What happens to a variable annuity death benefit when the annuitant dies?


Because the variable annuity cash value depends on the fluctuations of the stock market, its amount can be higher or lower than the aggregate of the premiums paid into the annuity. Under a variable annuity, the death benefit provides guaranteed protection against potential loss due to unfavorable market conditions.

Characteristics of the Guaranteed Death Benefit in Variable Annuities

With variable annuities, in the event of the annuitant's death, the beneficiary is entitled to receive the higher of two amounts:

  • the cash value of the account at the time of death, if the market conditions have been good,
  • or if there has been a market decline, an amount equal to the total sum invested in the annuity.

Some companies may also agree to pay interest on top of the amount of the premiums that the policy owner has paid towards the annuity.

Enhanced Death Benefits

Some insurers offer variable annuities that pay enhanced death benefits. There are three basic types of enhanced death benefits:

  • Rising-floor death benefits are periodically reset so that they guarantee the amount of the contributions made plus interest. A 3 percent rising-floor death benefit, for instance, is periodically reset so that the principal plus a 3 percent interest is received.
  • Stepped-up death benefits guarantee that if the fund has fallen to a lower level at the time of death, than what it had been before, the annuity death benefit amount would equal the higher level of the fund. The account value is adjusted periodically, such as every ten year, to lock in investment gains. If, for example, an annuity holder has put in $20,000 in the first year, in the tenth year the account will be worth $40,000, therefore the new, adjusted annuity death benefit is double the amount of what the owner has invested.
  • An enhanced earning death benefit pays extra amounts to the beneficiary when the annuitant dies for income tax purposes. If, for instance, an annuity holder invests $50,000 into a variable annuity and the death benefit has doubled by the time of the annuitant's death, the beneficiary will owe federal income tax on the gains. An enhanced earning death benefit provides part of this extra amount, such as 30 or 40 percent the amount of the gain, to help the beneficiary pay the tax.
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