The right balance of financial risk and security varies from one person to the next. That's why the life insurance industry keeps innovating to help provide people with different options for what may work best for them. For example, several decades ago, universal life insurance was first offered as a new life insurance product. Another example of innovation in life insurance is the death benefit rider. This option is available on some variable annuity and life insurance policies, and sets a minimum death benefit your beneficiaries can receive when you pass away.
The present value (or future benefits) of traditional variable annuities and life insurance contracts vary — hence their name — according to the performance of investments linked to those policies. With variable policies, insurance companies are shifting some of the potential risk to you. By doing so, they can offer more favorably priced policies. However, you could miss out on benefits that you or your policy's beneficiaries might otherwise have been entitled to under more favorable market conditions.
What Is a Death Benefit Rider?
Death benefit riders are optional add-ons that can help limit your downside risk with variable annuity and life insurance policies. There are different types of death benefit riders available. It's important to note that death benefit riders should not to be confused with living benefit riders.
Types of Death Benefit Riders
There are different ways that death benefit riders can work. Here is some information to consider.
Basic Death Benefit Rider
With a basic death benefit rider on a variable annuity contract, your beneficiary will be able to recoup (in the form of the death benefit) the amount you paid for the contract, minus any funds you withdrew. This is the case no matter what happens to the underlying portfolio or investment benchmark your variable annuity is tied to. The same idea applies to variable life insurance policies' cash value and death benefit.
Enhanced Death Benefit Rider
An enhanced death benefit rider goes a step further. It features a minimum growth rate on what your investment in the variable annuity or variable life insurance policy will accrue over time. Alternatively, it might guarantee a death benefit that's no lower than the highest value that the policy had ever been worth based on the underlying market returns. Suppose, for example, you paid $100,000 for a variable annuity and its value rose to $200,000 after 10 years. Then three years later, it dropped to $175,000. If you died at that point, your beneficiary would still receive a $200,000 death benefit.
As noted, the price of death benefit riders becomes an added periodic charge levied against the value of your contract. Some annuity contracts might also require that you "annuitize" — begin receiving annuity payments — to activate a death benefit rider. The specific charge will vary from one policy to the next, based on the details of your variable annuity or life insurance contract.
Is a Death Benefit Rider Right for You?
How can you decide whether to add a death benefit rider to your variable annuity or life insurance policy? It all comes down to your personal risk management philosophy, your overall life insurance needs, and possibly your amount of savings. The more cautious or "risk-averse" you are, the more you might want a death benefit rider.
Your insurance needs and level of savings (two sides of the same coin) are relevant as well. If you have accumulated enough savings that your beneficiaries won't be financially dependent on every penny of your variable life insurance death benefit or annuity contract, you might not feel the need to pay extra for that rider.
Carefully consider your individual circumstances, possibly with guidance from an insurance professional, before making big changes to the variable life or annuity contracts you already have.