The Dynamics of Variable Annuity with Death Benefit: A Comprehensive Breakdown

Shawn Plummer

CEO, The Annuity Expert

As we navigate the labyrinth of personal finance, the prospect of annuities, particularly a variable annuity with death benefits, often surfaces as an alluring prospect. But what does it indeed entail? What covers the cost of a variable annuity’s death benefit? The answers may seem elusive, but they need not be. Today, we’ll delve into the heart of these questions, exploring variable annuity death benefits, their costs, and the value they provide to you and your loved ones.

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Decoding the Variable Annuity

The Basics

A variable annuity is a contract with an insurance company. You make a lump-sum payment or a series of payments, and the insurance company promises to make periodic payments to you immediately or at a future date. The value of your account in a variable annuity investment can go up or down based on the performance of the investment options you choose.

Variable Annuity Death Benefits

The Addition of Death Benefits

Understanding the Death Benefit Variable Annuity

A significant feature that differentiates a variable annuity from other annuity types is the addition of death benefits. But what does a variable annuity with a death benefit entail? If you die before the insurer has started making payments to you, your beneficiary is guaranteed to receive a specified amount – typically at least the amount of your purchase payments.

Variable Annuity With Death Benefits

Financing Your Variable Annuity Death Benefits

Who Foots the Bill?

Now we delve into a crucial question: what covers the cost of a variable annuity’s death benefit? In simple terms, it’s the annuity owner who covers the cost. These costs are often deducted from your annuity’s account value in the form of mortality and expense risk charges, ranging from 0.5% to 2% per year of the account value.

Real-Life Illustration

Consider this: you’ve invested $100,000 in a variable annuity with death benefits. If the annual mortality and expense risk charge is 1.5%, you’ll pay $1,500 yearly, irrespective of the account’s performance.

 What Covers The Cost Of A Variable Annuities Death Benefits

Next Steps

The dynamics of a variable annuity with a death benefit may seem daunting, but as we’ve seen, it’s a well-understood journey. It can provide financial security for you and your loved ones when planned correctly. Remember, you cover the costs associated with a variable annuity’s death benefit, the annuity owner, ensuring your beneficiaries are protected. Knowledge is power, and understanding the intricacies of variable annuities and their death benefits is a powerful tool in your financial arsenal. As with any financial decision, consult a financial advisor to explore all the options suitable for your unique needs and aspirations.

Variable Annuity With A Death Benefit

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What fees are associated with variable annuities?

Variable annuities may have several associated fees, including mortality and expense (M&E), administrative fees, fund management fees, surrender charges, optional rider fees, etc.

If I attach a death benefit to my variable annuity, does my beneficiary owe income taxes on the payout?

Beneficiaries of a variable annuity with a death benefit will not owe income taxes on the payout. The amount received is considered part of the deceased’s estate and will be taxed accordingly, generally at lower estate tax rates.

Are variable annuities safe?

Variable annuities provide an element of safety compared to other investments with similar returns. That being said, variable annuities have inherent risks, including market volatility and the possibility of capital losses. It is essential to consult a financial professional before investing in any annuity or other investment product.

Do I need to pay taxes when withdrawing money from a variable annuity?

Any withdrawals from a variable annuity before age 59 ½ may be subject to an IRS penalty. In addition, any growth accumulated within the annuity is considered taxable income and will be taxed accordingly at both the state and federal levels. It is always best to consult with a tax professional before making.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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