What Really is a Death Benefit in a Variable Annuity?

Let?s talk about the basics first. Variable annuities allow the owner to invest in a wide range of options. These options can include stocks, bonds, real estate and a guaranteed fund. The investments are not mutual funds but a close family member called sub-accounts. The money is managed by the manager of each sub-account in accordance with the goal of that account.

Fees and More Fees

Variable annuities are noted for the fees they charge. The average annual expense on variable annuity subaccounts currently stands at 2.08% of assets, according to Morningstar. Many variable annuities also have loads on their subaccounts, surrender charges for selling within, say, seven years and an annual contract charge of about $35.

What Death Benefit?

The death benefit guarantees that your account will hold a certain value should you die. With basic accounts, this typically means that your beneficiary will at least receive the total amount invested, even if the account has lost money. Options are available at an additional cost that will allow your death benefit to increase over a period of time (life insurance). The fees charges for this ?additional benefit? are very high compared to just buying a separate life insurance policy. If additional life insurance is needed in your financial planning it would make much more economic sense to buy a separate policy.

According to LIMRA, an insurance industry research group, only 3 out of every 1,000 variable annuities are surrendered due to death. And this report doesn't even measure whether those four accounts were made whole by the death benefit. If the variable annuities were paid with invested funds then there was no death benefit paid by the insurance company which means all the fees paid to the insurance company would never be needed. The death benefit was paid with the owners own invested assets! Morningstar has calculated the annual fee for this death benefit to average 1.03% on the WHOLE value of the invested dollars in the variable annuity.

The death benefit fees charged to a variable annuity provide a huge benefit to the insurance company because the risk they are insuring is low and over time may vanish to no risk at all. Be informed about how this death benefit on variable annuities really works.

Bill Broich helps seniors manage their retirement money. Visit his website for additional information: Variable Annuities