An annuity is a contract between an insurance company and the beneficiary, providing payments over the beneficiary’s life. Annuities can be fixed or deferred, with different types of death benefits. Riders can be added to increase the death benefit, and underwriting determines the risk of insuring the beneficiary’s life.
An annuity is a contract, usually between an insurance company and the contract owner. The person who will receive the annuity payments is called the annuity. The owner and the beneficiary can be the same person. An annuity provides payments to the beneficiary over the life of the beneficiary. If the annuitant dies before the full value of the contract is paid, a death benefit from the annuity may be paid to a beneficiary named in the contract.
There are several types of annuities, and the annuity death benefit works differently depending on the type of contract it is. In general, annuities are either fixed or deferred. With immediate annuities, the beneficiary begins receiving contract payments immediately. If the beneficiary dies before paying the full value of the contract, the beneficiary usually receives the remaining money. To calculate the value of the death benefit of the annuity, interest accrues until the date of the beneficiary’s death.
If an annuity is deferred, the contract funds earn interest, but payments do not begin immediately. Payments begin on a specific start date indicated in the contract. Payments generally begin after a set number of years, called the deferral period. The beneficiary receives payments based on the amount of interest earned during the deferment period. This is called a pay or income period.
There are generally two types of deferred annuities, fixed and variable. A fixed annuity earns a fixed interest rate guaranteed in the contract. This rate is determined by the insurance company for the entire contract. As a result, annuity payments and death benefit may not keep pace with inflation.
In variable annuities, the contract funds are invested in different sub-accounts that are linked to the stock market. Payments and death benefits have a better chance of keeping up with inflation than they would in a fixed annuity. One major drawback is that it is possible to lose money if the shares linked to the sub-accounts lose value. Interest and the initial amount invested in the annuity may be lost.
The death benefit for deferred annuities is generally equal to any money remaining in the contract, plus interest accrued until the death of the beneficiary. For all types of annuities, contract add-ons, called riders, can be purchased to increase the death benefit. Riders may have fixed fares or fares may be determined through a process called underwriting.
Underwriting is the way the insurance company issuing an annuity determines how risky it is to insure the life of the insured. The subscription may include a review of the beneficiary’s health and lifestyle. This review may include medical exams, a credit check, and interviews with the beneficiary’s employer, family, and friends. In general, the higher the death benefit of the annuity, the more detailed the subscription will be.
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