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Most annuity contracts will provide some sort of death benefit. This benefit is different from a life insurance policy even though it works in a similar way. Unlike life insurance policies annuity death benefits will not guarantee payment to a beneficiary.
How the Death Benefit Works
The benefit is designed to dispose of money left in the plan if the beneficiary dies before he or she can receive all of the funds. This is set up to make sure that unspent funds can be left to family members.
Mr. Smith bought a $100,000 annuity for himself and Mrs. Smith shortly before their retirement. A few years after retirement the Smiths are both killed in a car accident. Since Mr. Smith named his daughter Sarah Jane as the beneficiary she would receive any money left in the plan. If the plan had paid out $15,000 to the Smiths, Sarah Jane would receive $85,000. Something to be aware of is that money would be taxable income so Sarah Jane would have to declare it on her return.
Generally the death benefit only covers money you invest in the plan. It will not include the continuing benefit from a lifetime annuity. Mr. Potter bought an annuity when he retired but he lived to be 101 and all the money in the plan was exhausted. Mr. Potter had a life annuity so he received payments until he died but his heir his grandson did not receive any money.
Other Types of Death Benefit
There are some other types of death benefit attached to annuities. Some plans have a life insurance policy attached so there will be a death benefit. This insurance policy is often fairly small but it should provide enough to cover funeral costs.
Not every annuity has this kind of benefit attached. You should definitely read the prospectus attached to the policy carefully to see what the death benefit is. Some insurance companies tack these onto every plan they issues. Others may charge you extra for it. Something to be aware of is that it could be possible to purchase a plan without the life insurance benefit if you ask.
If a person with an annuity with a life insurance benefit died. That individual’s beneficiary would inherit any money left in the plan and the life insurance benefit. If Mr. Smith had a $50,000 life insurance benefit on his annuity, Sarah Jane would have inherited that money as well.
How to Use the Death Benefit
If you think that you will outlive your annuity funds and you want to leave something for your heirs it might be a good idea to purchase an additional whole, universal or variable life insurance policy. This can insure that they receive something even if you exhaust the money.
You should purchase such a policy because term life usually expires at a certain age. There are some companies such as Jackson National that offer life policies that can cover you in advanced ages. You will have to pay extra for these but they could be a good investment for an older person.
Life insurance is a simple means of ensuring that your heirs will receive some funds. It is tax-deferred so you can deduct purchases of it from your income tax. There can some tax benefits to your heirs as well.
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