Annuity With An Increasing Death Benefit

Annuities serve many purposes, but you might want one to safely and efficiently transfer assets to your heirs. One popular annuity feature offers an increasing death benefit in order to guarantee growth each year.

This rider might be appropriate for someone who does not anticipate needing their funds. Perhaps they have ample liquidity and investments elsewhere. The annuity would only be accessed in an emergency, but would otherwise grow and increase in value.

Understanding Annuity Death Benefits

First, it’s important to understand almost all annuities offer a death benefit of some kind. Usually it’s the accumulated contract value – and usually surrender penalties are waived at death. That’s not the case 100% of the time, however. It’s a good idea to ask your agent just in case.

But in this low interest rate environment, some companies offer a rider that allows your death benefit to grow each year. Your account can grow for 10-15 years with some contracts. The growth would be locked in for the life of the rider. For example, one popular annuity policy is offering a 7% simple interest increase that’s guaranteed for 15 years.

This is a very smart way to lock-in growth and pass wealth to your beneficiaries. You’ll always know the value of your account and you don’t have to worry about market fluctuations.

Who Might Benefit From Guaranteed Annuity Growth?

With an account like this, it’s best to set it and forget it. You may not want to take regular withdrawals unless it’s absolutely necessary. That’s not to say you can’t, but any withdrawals would reduce your death benefit. That could defeat the purpose of the rider.

Thus, this policy might not work well for an IRA account. Why? Because IRAs have Required Minimum Distributions as you get older. Those forced withdrawals would decrease the death benefit.

It’s better to use post-tax money to fund this type of annuity. These are called non-qualified annuities. You are never forced to take any withdrawals from a non-qualified account.

Our clients who are most interested in this strategy usually already own a non-qualified annuity. In many cases, their existing contract hasn’t performed very well or it’s settled in at a low rate. They usually haven’t touched the investment – and don’t anticipate any regular withdrawals.

In this case, we would set up a 1035 tax-free exchange and transfer the old annuity to this new one. Any gains in the old annuity are deferred and no taxes are due. The account then rolls up at the established rate for the term of the rider.

Let’s take a look at an example using a $200K deposit with a 72 year old client.

Guaranteed Death Benefit:

Non-Guaranteed Death Benefit:

Outperforming The Guaranteed Value

In the above example, we used a $200K deposit for a 72 year old client and assumed no withdrawals. The annuity death benefit increases at a 7.00% simple interest rate guaranteed for 15 years. As of the writing of this post, these are real numbers with an existing product. None of this is made up.

You can see each year how the value of the death benefit increases. Should the owner pass away in any given year, the full listed death benefit would pass to their beneficiaries. After 15 years, you can see the annuity death benefit would be worth $410,000 on a guaranteed basis.

But this does not tell the whole story. There are guaranteed and non-guaranteed values at work here. The $410,000 assumes zero growth in the underlying investments in the annuity. In other words, this is the worst case scenario… and a highly unlikely outcome.

This particular indexed annuity offers several investment options. We used historically accurate data to show how the death benefit would increase assuming normal growth in a popular 2 year indexing account.

After 15 years the annuity death benefit (and contract value) would be worth much more. Assuming modest historical returns in the future, the death benefit would be over $500,000. But no matter what happens, the $410,000 is always guaranteed.

You always have the guarantees to fall back on, but if the annuity performs even reasonably well, your death benefit (and contract value) will be more than the guaranteed amounts. There is little risk in investing more aggressively. Most of our clients want to maximize growth using the indexing options available to them.

What Is The Cost? What About Taxes?

This particular death benefit rider has a .50% yearly cost to the policy. If you look at the contract values in the above example, you can see they decrease each year by 50 basis points. This fee does not decrease your guaranteed death benefit, however.

It’s important to note that this is not a life insurance policy. This means, yes, taxes are do on the gains when they are withdrawn. That occurs when the owner passes away.

Only life insurance passes income tax free to your beneficiaries. That’s why fixed and single premium life insurance policies are popular as a wealth transfer strategy. But not everyone can qualify health-wise for life insurance. An annuity policy like this one asks no health questions and has no medical underwriting.

At passing, your heirs (or the estate) would pay any income taxes due on the growth… same as all other annuities. So it’s only tax-deferred, but not tax-free. But that’s no reason not to try and grow the account as much as possible. Your beneficiaries might choose to withdraw the funds over 5 years to help reduce any income taxes owed.

Request Illustrations & Information

There’s a lot of creative ways to efficiently grow your money and transfer it to your loved ones. You could also use this to provide for a favorite charity. At Hyers and Associates, we specialize in annuity and life policies for wealth creation, tax mitigation, and asset transfer.

Contact us today to learn more about this guaranteed annuity strategy.