Annuities offer the potential for a guaranteed lifetime income stream, but concerns often arise about what happens to the funds if the annuitant passes away prematurely. While it’s true that in some cases, the annuity payments might cease upon death, proper structuring can ensure that beneficiaries receive benefits while still providing the annuitant with lifetime income.
Understanding Annuity Categories
Annuities primarily fall into two categories: those designed for wealth accumulation and those that provide predictable retirement income.
- Accumulation Phase: If the annuity is used for accumulating wealth and payments have not yet begun (annuitization), a named beneficiary will receive the annuity’s value upon the annuitant’s death.
- Income Phase: If the income portion of the annuity has been activated, specific provisions can be included to transfer the remaining balance to heirs.
Income Annuity Options
Various options exist for structuring an income annuity, some of which allow beneficiaries to receive unused funds as a lump sum or in ongoing payments after the annuitant’s death. When setting up an income annuity, the payment period must be selected. Here’s a breakdown of common options:
- Life Only Option: Provides income solely for the annuitant’s lifetime, ceasing upon death. A variation, joint-life payments, continues the income stream until the second person (e.g., a spouse) passes away. Often, joint-life payments are structured to decrease for the surviving individual.
- Life with Refund: Guarantees income for the annuitant’s lifetime and ensures that at least the initial investment amount will be paid out. If the annuitant dies before receiving the full investment, the beneficiary receives the remaining amount as continued payments or a lump sum, depending on the contract.
- Life with Period Certain: Provides lifetime income, but also guarantees payments for a minimum specified period, even if the annuitant dies. If the annuitant dies before the period ends, the beneficiary receives the remaining payments.
- Period Certain Only: Pays income for a set number of years, regardless of the annuitant’s lifespan. If the annuitant lives longer than the period, payments stop. If the annuitant dies before the period ends, the beneficiary receives the remaining payments.
These varied annuity structures have different implications. For instance, a life-only annuity typically offers a higher monthly payout than a joint-life option with a period certain for the same initial investment. Consulting a retirement income specialist is recommended to understand the nuances of each option.
Conclusion
Money invested in an annuity doesn’t necessarily disappear upon death. Annuities can be structured to leave a legacy for loved ones. However, it’s crucial to understand how each payout option affects payments and beneficiary benefits. Partnering with an annuity specialist can help determine the most suitable structure for individual circumstances.
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