It is difficult to measure the real value of a variable annuity death benefit. Conceptually, the value of any death benefit (except the “standard” death benefit that only pays contract value at death) is enormous if the investor has donative intent. The death benefit allows the contract owner to invest in one or more subaccounts he would not normally consider because of risk. The variable annuity investor is less concerned with risk because she knows that regardless of performance, the beneficiary(s) is protected (and will receive at least all premium dollars back, less any withdrawals prior to death).
If your client has no donative intent (no desire to leave assets to a spouse, child, relative, friend or charity), the death benefit has no value. In such a situation, the client will still end up paying the M&E charge and receive no benefit from the “M” portion (mortality). If you have a prospective variable annuity investor who has no donative intent (at least when it comes to the annuity), consider using a contract with a minimal death benefit—the annual cost should be lower.
The value of a death benefit is difficult to measure, but history can provide some real examples. A fairly recent example of how beneficial the death benefit can be was the early 2000s. There were literally tens of thousands of variable annuity investors who saw their contract values double or triple before they lost 50–90% in 2000, 2001, or 2002 (or even later during the 2008 meltdown).
The bull market of the 1990s created a lot of paper wealth—before the 3 back-to-back negative years in the early 2000s. Some of these annuity investors either died during the early 2000s or several years later, never seeing their variable annuity contracts recover. However, their beneficiaries were protected because of the death benefit. Thousands received a death benefit that was 50% to well over 200% greater than the contract’s actual value. Perhaps the real value of the death benefit is it allows the investor to possibly seek moderate to large gains, knowing if things do not work out, the survivor(s) is protected.