Annuity and Estate Planning
Questions and Answers about Annuities: Death Benefits & Estate Planning
What are Death Benefits and Annuity Estate Planning?
It may sound fairly grim or depressing to discuss “death benefits”, but death benefits are a main feature of many types of annuities and in fact are an important factor in the purchase of annuity. Arguably, investors purchase an annuity for one of two reasons—a way to invest in a tax-deferred option to create a stream of income for retirement, and as a way to pass along a portion of an estate to heirs.
Death benefits are a feature that are a part of almost every annuity. At its most simple, it is a guarantee by the issuer—the insurance company—that upon your death, your total premiums will be paid to your beneficiaries (at a minimum). Thus, any dollars that you have contributed to your annuity investment are passed along to your estate.
Beyond the basic minimum guarantee, many annuities offer a “step-up” provision. What this means is that there is a guarantee on more then the minimum of premiums invested; “step up’s” vary – as do the costs paid for them within the annuity contract—but some examples are:
4 On the anniversary of the date the annuity was purchased, guaranteeing the annuity to the highest value at any preceding anniversary
4 Guaranteeing a minimum 5% to 7% interest compounded annually
4 A combination of the prior two options—often defaulting to the higher of the two features.
What does this mean in real world terms? Let’s say you invest 100,000 in an annuity, and you’ve invested for the long-term. Your date of purchase is June 1. You are fortunate enough to gain from market gains and find, six years later, on June 1, that your annuity is worth an additional $250,000. Regardless of when you die, your heirs will receive a “death benefit” of $350,000—the highest value of your annuity on its anniversary date.
What if the market subsequently tanks, and your annuity is now worth $125,000—still more than you paid for it, but not what it was at the height of the market? The death benefit guarantee means your heirs will still receive $350,00.
Such protections come at a cost—and different death benefits are available with different products and insurance companies. Research what the cost of the guarantees are prior to making purchase decisions—and don’t jump on the highest benefit if it also means the highest costs. Lastly, don’t forget to do the due diligence on the financial soundness of the annuity issuer, to be sure they can pay any claims.
Ask questions of your advisor or do some online research, and you’ll find the death benefit that can be reassuring for you and your heirs—not a source of distress.
What About Charitable Annuities and Estate Planning?
Charitable Remainder Annuity Trust (CRAT)
A charitable remainder annuity trust (CRAT) is a popular type of life-income plan. Cash, securities, real property, or other assets are transferred into a trust. The trustee manages the trust assets and pays you or others you choose a fixed income for life or for a term of years. When the trust terminates, the remaining assets in the trust are transferred to the Church or one of its institutions.
The typical donor:
|Needs income for life or a specified term of years.|
|Desires a fixed income based on the original value of assets transferred.|
|Does not plan to make additional gifts to the trust in the future.|
|Is between the ages of 55 and 80.|
Gift features and benefits:
|Income for life (fixed payments)|
|Possibility of multiple beneficiaries|
|Assets transferred to the trust can be reinvested|
|Ability to choose the trustee (may be the donor)|
|Investment of assets is designed to balance income needs with preservation of principal|
How Do I Make a Gift Using a Charitable Remainder Annuity Trust?