What is an annuity death benefit?

An annuity is a contract, usually between an insurance company and the owner of the contract. The person who will receive the annuity payments is called an annuity. The owner and beneficiary can be the same person. An annuity provides payments to the beneficiary over the life of the beneficiary. If the beneficiary dies before the full contract amount is paid, an annuity death benefit may be paid to a beneficiary named in the contract.

There are several types of annuities and the annuity death benefit works differently depending on the type of contract it is. In general, annuities are fixed or deferred. With immediate annuities, the beneficiary receives contract payments immediately. If the beneficiary dies before the full contract amount is paid, the beneficiary usually receives the remaining money. To calculate the value of the death benefit of the annuity, interest is earned until the date of death of the beneficiary.

If an annuity is deferred, the contract funds earn interest, but payments do not begin immediately. Payments start on a specific start date indicated in the contract. Payments usually start after a certain number of years, called deferral period . The beneficiary receives payments based on the amount of interest earned during the deferral period. This is called the payment or entry period.

There are generally two types of deferred annuities, fixed and variable. A fixed annuity yields a fixed interest rate guaranteed in the contract. This rate is determined by the insurance company for the entire contract. As a result, annuity payments and death benefit may not keep pace with inflation.

In variable annuities, contract funds are applied to different sub-accounts linked to the stock market. Payments and death benefits have a better chance of keeping up with inflation than a fixed annuity. A major disadvantage is that it is possible to lose money if the shares linked to the sub-accounts lose value. Interest and the initial amount invested in the annuity can be lost.

The death benefit for deferred annuities is generally equal to any money remaining in the contract, plus interest accrued until the beneficiary's death. For all types of annuities, contract add-ons, called pilots, can be purchased to increase the death benefit. Fares can be set by passengers or determined through a process called underwriting.

The underwriting is how the insurance company that issues an annuity determines how risky it is to insure the policyholder's life. The signature may include a review of the beneficiary's health and lifestyle. This review may include medical examinations, credit checks and interviews with the beneficiary's employer, family and friends. Generally, the higher the death benefit of the annuity, the more detailed the underwriting.