The Insurance Company Gets
My Money When I Die
I must confess, it is hard for me, after so many
years in this business, that this myth prevails,
but prevail it certainly does.
Because I could not sell annuities to you if
this were the case.
Like any industry with a history of practice in this
country, however, there have been some
It was only fairly recently, (2009 or so), that
surrender charges (penalties assessed for early cancelation of annuity contracts) were forced by law to be waived upon death. Up until this time, there were certainly some carriers who still had in their policies actual language allowing those charges to be in effect if the annuitiant died prior to the end of the annuity term. This was a black mark on the industry, for certain, but a reputable agent would have always been diligent to find contracts that did not contain this language. Today, most newly issued contracts do not contain such provision, unless you have agreed to the rare type of contract that pays a very large bonus in the first year, for example, in which the bonus is only assumable at death if the beneficiaries withdraw it over several years.
Once again, an uninformed annuity buyer can set themselves up for disappointment, if for example, they purchased a strict life annuity without realizing it. This is also a very rare purchase and usually accomplished when a buyer has no heirs and wants the highest payout possible. The life annuity is purchased with a single payment and in exchange for that payment the annuitant gets a guaranteed monthly or annual check for the rest of their life, regardless of how long they will live. Obviously, the annuitant is betting against the insurer that he/she will live longer than the Insurer expects them to live to because usually most of the payments the annuitant receives, up until life expectancy, are just a return of their own money. Should the purchaser live beyond their life expectancy, they are living off the insurers dime.
In the meantime, however, if the owner dies prior to life expectancy, all those remaining payments will go to the insurance company, unless the owner set up what is called an installment refund where the remaining payments go to beneficiairies of the owners choosing.
Strict Life Annuities still exist, and are good for the right individual, but are not very common.
If you buy an equity indexed annuity with an income rider, a fee is charged annually that guarantees you a lifetime income (anwhere from .40% to 1.25%) That fee will be kept by the insurer, obviously, until you cancel the rider.
Beyond the aforementioned issues, insurance companies cannot keep your annuity funds beyond death. It is a myth, perpetuated by fear mongering, sometimes from consumer "advocates" who may not realize the details, sometimes from brokers who prefer you to invest in other financial instruments and lastly sometimes from the public at large who tend to embrace negative messaging for lack of investigation.