An annuity is a formal contract between you and an insurance company that can turn your lump sum rollover or deposits into a regular stream of income. The income can be paid either for a set period of years or for the rest of your life. But what happens to the money left in the annuity contract after you die?
Annuities have a long and illustrious history; they’ve been around since the Roman days and as such, they’ve continued to evolve. It used to be that once you put your money into an annuity, the insurance company kept anything that you didn’t use. Today, there’s no reason to think of your money as disappearing into a big black hole. Here’s how you can make sure that your annuity goes where you want it to go.
#1 THE GUARANTEED PERIOD OPTION
This option is sometimes called a “period certain” annuity because your income is guaranteed to pay out for a certain period of time. When you put your money into this type of insurance contract, you are guaranteed by the insurance company to receive a specific payment for a specific amount of time, based on the amount of money you put into the annuity. Any money left over in the contract upon your death continues to be paid out to your named beneficiaries until that period of time is over. Pros: Payment terms are typically higher with this option, and you can change your listed beneficiaries at any time. You may name more than one person as your beneficiary, including minors under the age of 18, and by including a beneficiary in an annuity contract, you may protect your heirs from the expense of probate. Cons: Beneficiaries may owe taxes on the money. If you fail to name a beneficiary, the annuity can go through probate and assets may end up being forfeited to the insurance company. Beware: Because the payments only continue for a certain number of years, you run the risk that your annuity will run out before you die.#2 LIFE COMBINED WITH A GUARANTEED PERIOD OPTION
This option is sometimes called “life with period certain.” It is similar to the option above, but your income is guaranteed for life. The “period certain” phase of this contract says that if you die during this period, your beneficiary will continue receiving the same income payments for the remainder of that time period. The most common arrangement is a “10 year period certain” where, for example, if you die five years after collecting your income, the payments would continue to your beneficiary for five years more. Pros: You no longer run the risk of outliving your money if you have no other source of income. Cons: Your income payment may be lower than the guaranteed period option. The amount of your payout is determined by how much you invest and your life expectancy. Beware: This option may not be a good way to provide for your spouse because the beneficiary only receives payment for the remainder of the period. If you die after that period is over, your spouse may not receive any payments.#3 THE JOINT-LIFE OPTION
If you are married and your households need your income payment in order to make ends meet, then you may want to structure your annuity to pay out for two lives instead of just one. Joint-life and survivor life options take into account your spouse or survivor. When you pass away, the payments will continue paying an income amount for as long as the survivor lives. Pros: You will likely receive the income for a longer time frame given the life expectancy of two people versus just one. You might also add a beneficiary for a specified time frame—for example, 10 years—as added protection. If you both die during that time period, the annuity may pass on. Cons: The monthly income amount is typically smaller for joint-life options versus the single life option. Beware: Some annuities give you the joint-life option without the cost of additional fees; other types of annuities may require the purchase of an income rider. Depending on the type of annuity you choose, the income rider may add an additional fee of 1 to 2 percent annually, charged for the life of the account.#4 THE DEATH BENEFIT PROVISION
Some kinds of annuities offer a death benefit provision. This is common with deferred annuities that grow your money for a period of time before the income payments even begin. The death provision says that your beneficiaries will be guaranteed to receive a certain minimum upon your death so that you can be sure that at the very least, the amount you paid into the annuity goes to your family. Pros: Many annuities that offer the death benefit option also give you step-up options where beneficiaries may be guaranteed a certain growth rate such as 5 or 7 percent. Cons: Unlike a death benefit received from a life insurance policy, the death benefit associated with an annuity is NOT tax-free. Your beneficiaries may still be required to pay income tax on this money. Beware: Death benefit provisions are commonly offered with variable annuities and that may cost you more. Variable annuities invest in the stock market so guarantees for this type of annuity are typically much more expensive as compared to the guarantees provided by other types of annuities. Different types of annuities offer different ways for you to provide income for a spouse and leave money to your family. If leaving money to your loved ones is important to you, then you will want to make sure to ask questions about beneficiary options before you buy. In addition to the income amounts, this consideration can help you shop around and compare one type of an annuity with another. For a full menu of annuity offerings, talk to one of our retirement income planning experts. We’re happy to answer any questions you might have.
