There is a lot to be said for annuities when it comes to your retirement. They’re the only commonly available financial vehicle, other than Social Security (or a pension if you still actually have one), that can provide a guaranteed stream of income for life, no matter how long you live.

But what if your lifetime doesn’t last as long as you hope? What happens to the money in an annuity when you die? Annuities sometimes get a bad rap from people who argue that if you die too soon, your family will get nothing. While that can be the case, there are numerous ways to structure an annuity to increase the odds that your family will get something if you die too soon, while still guaranteeing yourself income that you can’t outlive.

To understand the answer to the question, it’s important to first understand the two categories of annuities: annuities that help you accumulate funds for retirement, and annuities that provide stable income in retirement. Here’s what happens with the money in each annuity category when you die.

ANNUITIES THAT ACCUMULATE FUNDS FOR RETIREMENT

If you’re using an annuity to save for retirement and haven’t started taking an income stream (annuitization), your beneficiaries can typically get the current value of your annuity. That’s because the insurance portion of the annuity (which is what guarantees lifetime income) hasn’t been turned on yet.

ANNUITIES THAT PROVIDE INCOME IN RETIREMENT

Unlike annuities that are accumulating funds for retirement, which combine an accumulation feature with an insurance feature, income annuities are all insurance. And because you’re insuring that you might live too long through payments that won’t stop, that means the annuity might not pay as much if you die too soon. But there are a lot of different ways to structure an income annuity. Here’s how they work:

  • Life only. This bases your payments on your life. Once you die, the payments stop and no more benefits are paid. You can also have joint-life payments. With joint life, the payments continue until the second person dies. You can even have the payment to the second person decrease when the first person dies, which results in higher payments when both people are living. Couples frequently use this option.

  • Life with Refund. Payments will continue to you for as long as you live. But you or your beneficiary are guaranteed to get a least the amount you paid in. If you die before that amount is paid out, your beneficiary will get payments up to the amount that you initially paid for the annuity.

  • Life with period certain. In this case, your payments will continue until you die (or until your spouse dies if you select a joint-life option). But they will continue for a minimum period of time (say 10 or 20 years) even if you die. If you die prior to the end of the period certain, your beneficiary will get the payments.

  • Period certain only. Income is paid for a set number of years and then stops. If you die prior to the end of the period certain, your beneficiary gets the payments. If you outlive the period certain, the payments stop.

The different structures will result in different payout amounts for the same premium (what you pay for the annuity). For instance, a life-only annuity will pay more on a monthly basis than a joint life option with a period certain for the same premium. That’s why it’s a good idea to talk to a financial advisor about your specific situation. He or she can help you build an annuity income plan that’s best for your specific needs.

WHAT YOU LEAVE BEHIND SHOULD BE PART OF A LARGER PLAN

Ultimately, annuities should really only be one part of a solid retirement income plan. In many cases, the guaranteed income an annuity can provide can help protect other assets, like your investments, in retirement — preserving your investments to leave to your heirs while providing you with the income you need to live in retirement.

Annuities are contracts sold by life insurance companies and are considered long-term investments that may be suitable for retirement. Income annuities (either immediate or deferred) have no cash value and once issued they can’t be terminated (surrendered). The original premium paid is not refundable and cannot be withdrawn.

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