Variable Annuity Death Benefit

A feature shared by all variable annuities is a death benefit. This is an important feature because the investor selects one or more subaccounts (similar to mutual fund choices), ranging from conservative (i.e., a locked in rate for 1+ years), to moderate (a balanced portfolio of stocks and bonds), to aggressive (70-100% in stocks). Unlike any other investment vehicle, this benefit protects the investor’s principal (when a specified person dies), regardless of how the stock or bond market performs.

Understanding Your Options with Variable Annuities

All variable annuity contracts are either “owner driven” or “annuitant driven.” This simply means the death benefit is paid when the investor (owner) dies or when the annuitant (the measuring life of the contract) dies. For example, suppose Ed invests in a variable annuity that is annuitant driven and Ed names Mary as the annuitant. Further suppose Ed decides to invest his $100,000 in a small cap subaccount (one of several choices offered by the annuity) and the account drops to $23,000. Upon Mary’s death, Ed would receive at least $100,000.

As you can see from the example above, variable annuity death benefits can protect the investor’s principal, even if the investor decides to invest aggressively. The investor could also have a risk profile that was conservative, moderate, or aggressive and still protect a loved one—meaning a return of principal (or more) when the investor dies (an example of an owner-driven contract).

Annuity Death Benefit Options

Variable annuities offer investors one of four types of death benefits: basic, contract anniversary, initial purchase with a rising floor, and enhanced (all four are described below).

Basic Death Benefit for Variable Annuities

Death benefit is the greater of: (a) contract value at death, or (b) premium payments minus any prior withdrawals. There is no separate charge for this basic variable annuity death benefit; the contract’s M&E charge is what helps protect the insurer. Other death benefits are considered “enhanced” and their use typically means a separate and additional annual charge.

Contract Anniversary Value or Ratchet Death Benefit for Variable Annuities

Death benefit is the greater of: (a) contract value at death, (b) premium payments minus any prior withdrawals, or (c) contract value on a specified prior date. The “specified date” might be an earlier contract anniversary date (e.g., highest value at the end of every 7-year period, highest anniversary value, or an even more frequent date). A ratchet guaranteed minimum death benefit (GMDB) locks in the contract’s gains on each date specified.

Initial Purchase Payment with Interest or Rising Floor Death Benefit 

Variable annuity death benefit is the greater of: (a) contract value at death, or (b) premium payments minus prior withdrawals, increased annually at a specified interest rate. Sometimes the same contract includes a ratchet and rising floor; other contracts may only offer a choice between these two features.

Enhanced Earnings Death Benefit for Variable Annuities

A separate variable annuity death benefit designed to help offset the taxable portion of the contract. Beneficiaries receive a base death benefit amount plus an additional amount that is usually a percentage of the earnings (growth). This “percentage of earnings” added benefit can be used for any purpose but is typically marketed as extra money that may be used to help pay for any of the contract’s income tax liability. The formula used for an enhanced earnings benefit (EEB) can be a little more complex (and perhaps somewhat less appealing) than it first appears.