Variable Annuity Death Benefits
The standard death benefit for a deferred variable annuity is the greater of the contract value of any remaining assets at death, or the total premiums paid less distributions received by death. It is provided to the beneficiary.
In addition to optional withdrawal benefit riders (also called living benefits), many deferred variable annuities also offer optional death benefit riders that create an opportunity for more than the standard death benefit. One should look carefully at these as they could be counterproductive for those focusing on getting the most guaranteed income from their variable annuity. For instance, a common death benefit rider could support a death benefit equal to the full value of the annuity premiums if at least one dollar remains in the contract by an advanced age. One must consider whether it is a wise choice if the focus is otherwise placed on maximizing the spending power afforded by an income guarantee.
With our focus on maximizing spending power, we maintain a willingness to deplete the underlying contract value for assets. But to keep the death benefit, the contract value must stay above $0, which could create complications because the income guarantee could never be activated if the death benefit is to be maintained. Such a death benefit could be more worthwhile for individuals who are not seeking to get the most possible value out of their income guarantee, such as a strategy to pay RMDs from the underlying assets while preserving their initial value as a death benefit. Generally optional income benefit and death benefit riders should not be combined because they serve different purposes.
Another optional death benefit guarantee may set the death benefit at the higher of either the initial premium, the contract value, or the benefit base, but then reduce the death benefit for any distributions taken. It would not be worthwhile to pay extra for this when focused on taking distributions.
Some retirees may consider these death benefit options as an alternative to permanent life insurance (especially when no longer insurable) if generating income is not the primary focus for this portion of the asset base. Also, later in retirement if the sequence risk issue did not materialize and the retiree is in good shape, the focus may start to shift toward passing wealth to the next generation with minimal need for further distributions, and a variable annuity with an additional death benefit rider can be an option to consider in this circumstance. This emphasis on legacy as the primary goal falls outside our scope. With our analysis, we do seek to not needlessly sacrifice legacy, but the focus is on maximizing sustainable retirement spending in the most efficient manner in order to indirectly also support legacy.
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This is an excerpt from Wade Pfau’s book, Safety-First Retirement Planning: An Integrated Approach for a Worry-Free Retirement. (The Retirement Researcher’s Guide Series), available now on Amazon AMZN .