Understanding Riders in Annuities
The Death Benefit Rider Sales Pitch
Riders are endorsements added to annuity contracts sold to enhance the benefits payable under those contracts. There are several types of riders, two of the most common being income riders and death benefit riders. We have written on numerous occasions in this column about income riders. The subject this time is death benefit riders. We believe you should understand how they work.
Chances are, if an agent has pitched you on a deferred annuity as a retirement savings vehicle, he or she promoted its “death benefit” as an additional selling point. According to the sales pitch, death benefits guarantee your heirs a return of your annuity premium (or more) upon your death. You’ll pay extra for this protection (known as a “rider” to your policy) but the agent may try and convince you the cost is worth it. The San Francisco and California annuities attorneys at Evans Law Firm, Inc. advise caution. Every day, we see annuity features like death benefits disappoint policyholders, cost more and more, and erode returns on your hard-earned money. If you or a loved one is over 60 and live in California and has lost money due to death benefit or income riders, surrender charges, or other fees associated with an annuity, call the San Francisco and California financial elder abuse and annuities lawyers today at Evans Law Firm, Inc. (415) 441-8669 and we may be able to help.
What’s Wrong with Death Benefit Riders?
The basic death benefit offered under a deferred annuity is a guarantee that after your death, the insurance company will pay your beneficiary at least the amount you put in (reduced by whatever you have taken out). But that doesn’t sound like much of a benefit, so most carriers offer an “enhanced” death benefit as well. An enhanced death benefit offers monthly or annual “step-ups” in the base for calculating the death benefit. If the policy has a monthly step-up, the insurance company takes a snapshot of your account value each month. The highest monthly recorded value becomes the death benefit amount when you die, even if the market value is currently less. These death benefit riders cost more than the basic death benefit itself. A death benefit rider that has a monthly step-up might cost you anywhere from .25 to .50 percent of the account value per year. A cost of .50 percent a year can add up considerably over time.
The riders go by a variety of names: Enhanced Death Benefit Rider, Accumulator Rider, “Greater Of” Death Benefit, Guaranteed Death Benefit, Return of Premium Rider, and HAV Rider (Highest Contract Anniversary). Whatever the brand name, the fees add up fast. On an annuity offering say a 3% return you might lose half your return when you accept the coverage. If you have too many extra riders on your variable annuity, the fees can add up to 3.5 percent to 4 percent a year. High fees make it almost impossible for the investments to perform well enough to earn back the fees and grow, so be cautious about adding features that you don’t really need.
Whatever the cost, the death benefit may be pointless because the benefit may never be paid. That’s because the death benefit is lost (or, at a minimum, reduced) when you annuitize (accept the income stream you were promised in the first place), make a withdrawal, or surrender the contract (and likely incur a surrender penalty). Even if some benefit is paid to your heirs, you most likely overpaid for the protection. As an example, a 1.5% death benefit charge on a $250,000 annuity would be $3,750 per year. Published insurance industry data suggests term life insurance in the same amount would be less expensive.
Annuity death benefits may also have tax consequences. Unlike the death benefits paid by an ordinary life insurance policy, the death benefit from an annuity does not pass to your beneficiaries on a tax-free basis. Your heirs will have to pay tax on the accumulated growth and income. At Evans Law Firm, we have seen policyholders hit with unexpected tax bills on annuity surrenders and distributions. Be sure to consult with your tax advisor regarding any annuity product and before you select any riders, including income and death benefit riders. The tax implications hold true for any rider by whatever name: Enhanced Death Benefit Rider, Accumulator Rider, “Greater Of” Death Benefit, Guaranteed Death Benefit, Return of Premium Rider, and HAV Rider (Highest Contract Anniversary).
Annuities are extremely complex and not for everybody. Promises of high returns in a low interest rate world really are too good to be true. Promised death benefits may be too good to be true as well, regardless of whether you have an Enhanced Death Benefit Rider, Accumulator Rider, “Greater Of” Death Benefit, Guaranteed Death Benefit, Return of Premium Rider, and HAV Rider (Highest Contract Anniversary). Fees and commissions destroy returns, especially if little or no benefit is ever paid out to your heirs. Annuities tie up your money for years and withdrawals for emergencies may incur very steep surrender penalties. Surrenders and withdrawals may eliminate or reduce any death benefit. We at Evans Law Firm understand all these drawbacks to death benefit riders. If you are over age 60 and live in California, our attorneys are able to review your annuity at no cost if you believe that you or a loved one were victims of annuity fraud or suffered a financial loss as a result of an unsuitable annuity. We represent clients throughout the State of California.
Some of the major annuity and life insurance providers in California are listed below. We are not in any way suggesting that these carriers have been involved in any wrongdoing whatsoever. Rather, the list is provided solely for our readers’ reference.
Allianz Life Insurance Company of North America
Allstate Life Insurance Company
American Equity Investment Life Holding Company
American General Life Insurance Company
American National Life Insurance Company
Ameriprise Financial/RiverSource Life Insurance Company
Athene Annuity and Life Company
AXA Equitable Life Insurance Company
Bankers Life Insurance and Casualty Company
EquiTrust Life Insurance Company
Fidelity & Guaranty Life Insurance Company
Forethought Life Insurance Company/Global Atlantic Financial Group
Genworth Life Insurance Company
Global Atlantic Financial Group/Forethought Life Insurance Company
Guardian Life Insurance Company
Guggenheim Partners/Security Benefit Life Insurance Company
ING USA Annuity and Life Insurance Company
Jackson National Life Insurance Company
John Hancock Life Insurance Company
Life Insurance of the SouthWest/National Life Group
Lincoln Financial Group/The Lincoln National Life Insurance Company
MassMutual/Massachusetts Mutual Life Insurance Company
Metlife/Metropolitan Life Insurance Company
Midland National Life Insurance Company
Mutual of Omaha/United of Omaha Life Insurance Company
National Life Group/Life Insurance of the SouthWest
New York Life Insurance Company
Northwestern Mutual Life Insurance Company
Pacific Life Insurance Company
Principal Life Insurance Company
Pruco/Prudential Life Insurance Company
RiverSource Life Insurance Company/Ameriprise Financial
Security Benefit Life Insurance Company/Guggenheim Partners
Symetra Life Insurance Company
Transamerica Life Insurance Company
United of Omaha Life Insurance Company/Mutual of Omaha
Unum Life Insurance Company of America
Voya/Reliastar Life Insurance Company
If you or a loved one is over 60 and lives in California and has lost money due to death benefit or income riders, surrender charges, or other fees associated with an annuity in San Francisco or elsewhere in California, contact California financial elder abuse and annuity attorney Ingrid Evans and the other attorneys at Evans Law Firm, Inc. at (415) 441-8669, or by email at <a href=”mailto:firstname.lastname@example.org”>email@example.com</a>. Our attorneys have experience with complex financial contracts and large insurance companies. We can help guide your case through arbitration, jury trial or toward an equitable settlement. We handle cases involving physical and financial elder abuse, nursing home abuse, qui tam and whistleblower law, whole life insurance and universal life insurance, and indexed, variable, and fixed annuities.
 We represent clients who have suffered financial losses from annuities but we do not offer investment or tax advice.