Annuity Death Benefits: How They Are Paid

Today, we're talking about annuity death benefits. How do they work? It's like you are buying an annuity, and you die. What happens? We will go through that and how they are paid with annuities now.

Life insurance companies issue life insurance, which is the best death benefit you can ever get, lump sum tax-free to the beneficiaries. I mean, if Stan The Annuity Man dies, you need to do an investigation because my family's just gotten rich. I love life insurance. I don't sell it, but it's the best death benefit out there. Best return on investment you're never going to see because you're dead, right? Don't panic. Now you have annuities.

Life insurance companies issue annuities, I know. It sounds weird, but annuity death benefits are not tax-free, and you have to go through an underwriting process. You have to fill out the forms and you have to get medical records, and the really nice nurse comes to your house and gets blood, and you have to pee in a cup.

Don't fill the cup up. They only need a little bit. I filled it up one time. They're like, "No, no, no, just this little..." Okay, I digress. So, you got that. You have to go through the underwriting process. In other words, they have to approve you.

Guarantee Issue

With annuities, you don't need approval. Remember those Lucky Strikes with no filters? I think you smoked that, right? No, you didn't. Okay. You smoked the filter one. Lucky Strike with no filters and drinking a bottle of Jim Bean daily. That's a goal-setter. And you couldn't qualify for life insurance for anything. Annuities? Guaranteed, which means that they're going to issue it to you, period. That's a good thing, but it's not tax-free. So, which one's better? Well, if you can qualify for life insurance, it's better.

Death Benefit Rider

I don't sell it, but it's better. But a lot of people out there, a lot of you baby boomers, turn 65 every day, 10,000 of you every single day; you live a hard life. Remember this: Life insurance companies have big buildings for a reason. They want to insure healthy young people, right? They don't want to insure people who have issues, etc. But with annuities, you can attach what's called a death benefit rider. A rider is an attached benefit to a policy that you can attach at the time of application. And there are probably, I'd say, at this time of this blog, fewer than 20 companies that offer a death benefit rider, which is a guaranteed issue. Now, those are paid a little differently than lump sum tax-free with the life insurance. You can get it lump sum with annuities and a death benefit rider.

You can also get a five-year payment if they offer that. And some companies even offer annuitization. Not so many, I don't think, as in recent years, but for most people, 99.9%, it's either a lump sum or a five-year payment with the annuity death benefit.

Death Benefits

Okay, let's talk about death benefits on annuities that don't have a death benefit rider. If you buy a Single Premium Immediate Annuity and set it up where 100% of any unused money goes to the beneficiaries, that's a death benefit. That would be either life with cash refund or life with installment refund, or life with a specific period, certain that would be a death benefit. That would apply also to Qualified Longevity Annuity Contracts and Deferred Income Annuities. Those are what's called annuitized products. Annuitized means to create payments. Think of a water faucet.

Annuitization

I got called the other day, he goes, "I really don't understand annuitization." He goes, "What is that?" I'm like, "Envision you have..." In the past, when I lived in the south, we called them water spigots attached to the house. You had a water spigot, and you turned it on. Water flows. Let's just assume you rip the knob off of that. Water's just going to flow, and there's nothing you can do. In essence, that's annuitization. Annuitization is ripping the knob off and the payments are going to come regardless.

Now, you can structure it so that it can be on your life or joint life, so two lives, and you can structure it so that any unused payments when you or a spouse pass go to the list of beneficiaries. That's a death benefit.

Deferred Annuities

Let's talk about other death benefits with other products. Let's talk about, say, Deferred Annuities. These aren't income annuities; these are Deferred Annuities, like Multi-Year Guarantee Annuities, Fixed Indexed Annuities, or Variable Annuities that don't have any riders attached. You just have those policies. The death benefit is the accumulation value of those policies.

So, let's go one by one. With a Multi-Year Guarantee Annuity, that's like a CD. That's the annuity industry's version of a CD. The death benefit would be whatever that interest rate has grown by; the principal's protected, and it's a Fixed Annuity. That's the death benefit. Now, you can get that lump sum or paid out over five years with most carriers. Same thing with Fixed Indexed Annuities. I know it's sold as a market product, but it's not. It's a CD product, and that's fine. But it also fully protects the principal. So, what's the death benefit? The death benefit on a Fixed Indexed Annuity without a rider is that index option that's been growing at CD-ish type rates. Some years are a little bit better than others, but the blended rate of return is typically CD or enhanced CD-type rates.

With Variable Annuities, the death benefit is the separate account. You and I call them mutual funds inside that policy and what they have grown to, which will go to your beneficiaries, either lump sum or paid out over five years. So, put in the back of your head, life insurance is the best death benefit you can get. But if you want a death benefit on an annuity, you can buy an attached rider. Or if you don't want to have an attached rider to the policy, by the way, when I said buy, there is a fee for those riders that comes out of the accumulation value. But if you don't want to do that, you can structure all annuity types so that 100% of any unused money goes to your beneficiaries, which, in essence, is a death benefit.

Don't panic. Don't panic. I have to wear it on my shirt. I have to wear it on my sleeve. No, I'm wearing it on the front. But anyway, talking about death benefits, people who are asking the question either own the policy or are beneficiaries of the policy, right? I get a lot of calls from the kids looking for the money and what's the setup of the beneficiaries? Well, only the owner can make that call. I cannot give that away to the beneficiaries.

Beneficiaries

Now, talking about beneficiaries, you can list as many beneficiaries on the policy as you want. You could have 100, you could have two, you could have three. You could have them in tiers. You could have a primary beneficiary and a secondary beneficiary. Tertiary means three. Third-level beneficiary. You can set them up, and they're revocable, meaning somebody could make you mad and be removed from the annuity policy as a beneficiary.

You just have to work with us at The Annuity Man, and we can get you the proper forms to change those beneficiaries or to change the percentages. I'll give you an example.

Client Example

I had a guy call the other day, and he wanted to buy a Fixed Rate Annuity and a Multi-Year Guarantee Annuity. He wanted three levels of beneficiaries for the death benefit. So, he had his spouse as his primary beneficiary, 100%. He had two kids. They were secondary beneficiaries, 50% each, and then he had the children. He had four grandchildren from the two children, each 25% each. Let's go through that. Wife's at 100%. So, if he dies and the wife's still alive, the wife gets it all—100%. If he and his wife die in the fiery plane crash, that's not good, but let's just say they do, then the two kids move up. They're secondary beneficiaries and they get 50/50. They split it in half. But let's say the mom and dad and the kids went on the plane, the grandkids went to camp, and the plane hit the mountain. Then the grandkids that were 25% each, four of them, they get it split 25% of the death benefit. Makes sense. Absolutely. You're in control of that. You can dictate who the beneficiaries are, the percentages, the level, primary, secondary, and tertiary. You can have as many as humanly possible but understand that life insurance is the best death benefit on the planet.

Again, life insurance companies issue annuities, which also have a role in death benefits. People die, right? Isn't that true? Isn't that kind of morbid? I digress. There are a lot of people who own annuities that are passing away, and there are many who are inheriting annuities. And with inherited annuities, there are some nuances you need to be aware of.

So, with that, thank you for joining me today, and I will see you on the next Stan The Annuity Man blog.

Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.