A little boy runs into his grandpa and says, “Can you make a sound like a frog?” Grandpa replies, “of course I can make a sound like a frog. Why do you ask?” The boy says, “Grandma says when Grandpa croaks we can all go to Hawaii.” Grandma and Grandpa knew their money was protected and safe in Grandpa’s indexed annuity.
There are many common questions that I am asked by investors as they learn about indexed annuities. “What happens to my fixed annuity when I die?” is one of the most critical. First and foremost, 100% of the remaining assets will pass on to your beneficiary. Although contract verbiage may vary from insurance company to insurance company, all of the assets in the contract value at the time of your passing will pass on to your beneficiary.
As the owner of the policy, you get to choose to whom the remaining assets will pass to. You can choose both primary as well as secondary beneficiaries and the percentage you wish to provide to each. Organizations may also be the beneficiary if you choose. The beneficiary can change as your circumstances and or desires change over the years. On any current investment or insurance policy, please review your beneficiary and update if appropriate.
The beneficiary also has multiple options on the dispersement of the funds. Options do vary if the beneficiary is a spouse, or someone else. Two of the most common distribution methods include a lump sum payment, or taking payments stretched out over a longer period of time. As an example, if you are the beneficiary of $1 million dollar IRA annuity, stretching the payments out over several years may benefit you so you don’t have to pay taxes all in one year.
The taxation of an annuity is based upon the tax structure of the investment when it is created. For example, if you have $500,000 in an old 401K or IRA, the assets are qualified by the IRS, and will be taxed at ordinary income rates at the time they are distributed whether by the owner, or the beneficiary. Roth annuities also may be set up, and the distribution to the owner or beneficiary is then tax free.
Once again, your financial goals and purposes have flexibility with an Indexed Annuity. Your assets will be protected, while they are growing. For some investors, passing their wealth on for legacy purposes is their goal. Equity Indexed annuities again allow this to happen. This will happen as a result of the owner passing, and can be enhanced with the use of an enhanced death benefit rider. In recent years, some carriers have added an option for those investors who don’t anticipate utilizing the assets in their annuity for income for themselves, but rather want to pass on as much as possible to their heirs. Enhanced death benefit riders may vary, but generally speaking, the insurance company will guarantee a certain percentage of growth, and the death benefit is guaranteed to be a certain amount.
It’s only one question, but it’s an important question, “What happens to my fixed annuity when I die?” There is safety and protection in knowing your indexed annuity will grow, provide income, and 100% of the remaining value will pass on to your beneficiary.
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