Benefits of variable annuities after you're gone

Over the past two weeks, I have been describing some of the basics about variable annuities and how they work. This week, I'll present information about the death benefits of variable annuities, which have become an important part of the retirement and investment plans of many Americans.

A common feature of variable annuities is the death benefit. If you die, a person you select as a beneficiary will receive the greater of all the money in your account or some guaranteed minimum, such as all purchase payments minus prior withdrawals.

Example: You own a variable annuity that offers a death benefit equal to the greater of account value or total purchase payments minus withdrawals. You have made purchase payments totaling $50,000. In addition, you have withdrawn $5,000 from your account. Because of these withdrawals and investment losses, your account value is $40,000. If you die, your designated beneficiary will receive $45,000 (the $50,000 in purchase payments you put in minus $5,000 in withdrawals).

Some variable annuities allow you to choose a "stepped-up" death benefit. Under this feature, your guaranteed minimum death benefit may be based on a greater amount than purchase payments minus withdrawals. For example, the guaranteed minimum might be your account value as of a specified date, which may be greater than purchase payments minus withdrawals if the underlying investment options have performed well.

The purpose of a stepped-up death benefit is to "lock in" your investment performance and prevent a later decline in the value of your account from eroding the amount that you expect to leave to your heirs. This feature carries a charge, however, that will reduce your account value.

Variable annuities sometimes offer other optional features, which also have extra charges. One common feature, the guaranteed minimum income benefit, guarantees a particular minimum level of annuity payments even if you do not have enough money in your account (perhaps because of investment losses) to support that level of payments. Other features may include long-term care insurance, which pays for home health care or nursing home care if you become seriously ill.

You may want to consider the financial strength of the insurance company that sponsors any variable annuity you are considering buying. This can affect the company's ability to pay any benefits that are greater than the value of your account in mutual fund investment options, such as a death benefit, guaranteed minimum income benefit, long-term care benefit, or amounts you have allocated to a fixed account investment option.

You will pay for each benefit provided by your variable annuity. Be sure you understand the charges. Carefully consider whether you need the benefit. If you do, consider whether you can spend less money by buying the benefit as part of the variable annuity or separately (e.g., through a long-term care insurance policy).

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The charges you'll incur investing in variable annuities.

Zall, Bureaucratus columnist and a retired federal employee, is a freelance writer based in Silver Spring, Md. He specializes in taxes, investing, business and government workplace issues. He is a certified internal auditor and a registered investment adviser. He can be reached at milt.zall@verizon.net.