Variable annuities’ guaranteed death benefits have become more appealing. The original guarantee was a return of premiums paid. Thus, if you put $100,000 into a variable annuity and die five years later with the contract value at $90,000, your beneficiary would get $100,000.
This money-back guarantee has given way to a variety of escalation formulas. The death benefit will be the greater of the contract value at death, the amount invested, or the amount set by some calculation method.
Re-set guaranteed death benefits. The standard is a five-year re-set. Thus, if you put $100,000 into an annuity on May 1, 2000, the value would be re-assessed on May 1, 2005, May 1, 2010, etc. The highest of these values (including the initial outlay) becomes the new guaranteed death benefit, which can go higher but not lower.
Step-up or ratchet death benefits. These work the same as the five-year re-set, except that they usually call for the contract to be re-evaluated every year, on the anniversary date. Thus, all the May 1 values would be weighed, including the date of purchase, and the highest becomes the guaranteed death benefit. Some variable annuities offer a quarterly ratchet, so there’s even a greater chance of attaining a peak death benefit.
Roll-up death benefits. These offerings promise a certain escalation, often 3% or 5% per year. Some annuities even have a “greater than” guaranteed death benefit. When the investor dies, the beneficiary gets whatever is greatest: the premiums paid, the current contract value, an assumed 5% annual return, or the peak death benefit on a specified anniversary date.
