Enhanced Death Benefit
An optional rider that pays beneficiaries an amount greater than the contract value, typically for an added annual cost.
An enhanced death benefit is an optional annuity rider that pays beneficiaries more than the plain account value at death. Common designs pay the greater of account value and premiums paid, a value that steps up to prior contract anniversaries, or a value that grows at a stated roll-up rate. It is bought with an annual charge, so its value depends on whether the enhancement is likely to exceed what that charge costs over time.
- —The standard death benefit in most deferred annuities is account value, or premiums less withdrawals - the rider is what goes beyond that.
- —Three common designs: return of premium, annual step-up or high-water mark, and a roll-up at a stated rate.
- —Roll-up values are almost always a death benefit base, not a withdrawable amount.
- —The rider charge is deducted whether or not the enhancement ever pays, which is why the fee and the design must be read together.
Common designs lock in high-water marks on contract anniversaries, credit a stated roll-up to a death benefit base, or cover taxes owed by beneficiaries.
An enhanced death benefit is not life insurance. Annuity gain is generally taxable as ordinary income to the beneficiary, and withdrawals typically reduce the benefit base on a proportional basis.
The three common enhanced death benefit designs
Contract language differs by carrier, but nearly every enhanced death benefit falls into one of three families. Withdrawals reduce all of them, usually proportionally rather than dollar for dollar, which is the detail most often missed.
| Design | What beneficiaries receive | Main limitation |
|---|---|---|
| Return of premium | The greater of account value and total premiums paid, less adjusted withdrawals | No benefit if the account has grown |
| Annual step-up / high-water mark | The highest anniversary value ever locked in | Step-ups often stop at a stated age |
| Roll-up | A benefit base credited at a stated annual rate | Payable at death only; not a cash value |
Why withdrawals matter more than owners expect
Most enhanced death benefits reduce proportionally when money is withdrawn. A withdrawal of ten percent of account value can reduce the death benefit base by ten percent of its own, larger value - a dollar amount considerably bigger than the withdrawal itself when the benefit base exceeds the account value.
This is a factual feature of the rider rather than a defect, but it makes the interaction between a withdrawal plan and a death benefit rider worth reading before, rather than after, the first withdrawal.
Reading the rider against its charge
An enhanced death benefit is a purchase, not a bonus. The annual rider charge is typically a percentage of account value or of the benefit base, deducted every year the rider is in force.
- —The exact annual charge and whether it is assessed on account value or on the benefit base
- —The age at which step-ups or roll-ups stop crediting
- —How withdrawals reduce the benefit - proportional or dollar for dollar
- —Whether the beneficiary must take a lump sum or may elect payments
- —Whether life insurance would serve the same estate purpose differently
Frequently asked questions
- Do all annuities have a death benefit?
- Most deferred annuities include a standard death benefit equal to account value, or premiums less withdrawals. An enhanced death benefit is an optional rider that pays more than that standard amount, in exchange for an annual charge.
- Is an annuity death benefit taxable to beneficiaries?
- Gain in an annuity is generally taxable as ordinary income to the beneficiary when received; it does not receive a step-up in basis the way many other inherited assets do. A tax adviser should confirm treatment for a specific contract.
- Can I use the roll-up value while I am alive?
- Usually not as cash. A death benefit roll-up creates a benefit base payable at death. It is not a surrender value and generally cannot be withdrawn as a lump sum.
- Does the death benefit rider charge stop at some point?
- Some contracts stop crediting increases at a stated age while continuing to deduct the charge. That combination is one of the more important things to verify on an in-force contract.