What is an annuity death benefit, and how does it work?

1 min read by Unbiased team Last updated June 14, 2024

We unpack annuity death benefits, looking at what they are, how they work, how to determine their size, how to increase them, and what riders are.


  • An annuity death benefit allows you to leave the remaining assets in your annuity, which generates income during your retirement, to loved ones. 

  • You can increase the size of your death benefit with riders, such as annual increases or market-related increases. 

  • Match with a financial advisor for expert advice regarding annuities and death benefits. 

What is an annuity death benefit? 

Many people use annuities to generate income for their retirement.  

Most of these financial contracts feature an annuity death benefit, which allows you to bequeath assets from the annuity to one or more beneficiaries after your death.  

How does the annuity death benefit work? 

An annuity is a contract between yourself and an insurance company. You purchase the contract by paying a set amount of money to the insurer, who agrees to pay you according to a specific schedule. You can start receiving payments immediately or defer the payments until later.  

A standard annuity death benefit may be included as part of your contract.  

This benefit allows you to name one or more beneficiaries who will receive a financial payout from the annuity when you die.  

While there are some similarities between these benefits and life insurance policies, there also are some important differences.  

Like insurance policies, annuity death benefits are taxable, although the tax liabilities are different. Additionally, death benefits payout is different in annuities than in life insurance policies. Beneficiaries can opt for regular payouts or a lump sum payment

How do you determine the size of an annuity’s death benefit? 

You can determine the size of a regular annuity death benefit using one of two ways.  

The first way is to choose a predetermined minimum amount for the benefit.  

For example, you can choose that the annuity pays out what you paid in premiums minus any money you received from it in your lifetime.  

If you choose this option, the amount your beneficiary receives depends on what you paid. It takes into account the difference between the market value of the annuity and any payments you received. 

The second way is to stipulate that any of your annuity’s remaining assets will be paid out to your beneficiaries.  

For example, if you purchased a $500,000 annuity that paid out $350,000 during your lifetime, your beneficiaries will receive the remaining $150,000 when you die. 

Regardless of which of these two ways of determining the size of your annuity death benefit, the payouts may be unpredictable.  

This is even more of a factor if you opt for a variable annuity death benefit rather than a fixed option, as your returns may fluctuate based on the investment’s performance.  

A good rule of thumb is that the higher the annuity’s value and the greater the value of the money left in it when you die, the larger the benefit that your beneficiaries will receive. 

How can annuity death benefits be increased? 

Insurance companies sometimes offer opportunities for you to increase the size of your annuity death benefit. This usually happens by adding riders to your annuity, for which you need to pay a fee.  

Typical options that insurance companies make available include market-linked increases and annual increases. 

  • Market-linked increases 

Market-linked increases link increases in your death benefit to the movements of the stock market.  

There is no way of predicting what the market will be doing when you pass away, which gives this option an element of uncertainty. If you die during an upswing in the market, your annuity death benefit should increase automatically. However, if you pass away during a downturn, your annuity will be impacted.  

One of the main advantages of market-linked increases is that there’s the possibility of locking in market gains for your beneficiaries, provided that the annuity’s underlying assets perform well when you pass away.  

Even if they don’t, upgrading the death benefit with market-linked increases can guarantee that your beneficiaries will receive your premiums paid minus any investment gains. 

  • Annual increases 

Annual increases see your annuity death benefit grow larger year over year as you age. The longer you live, the more money you will receive from the annuity.  

If you choose this option, your insurance company will increase the death benefit payout that your beneficiaries can receive. The basic premise here is that, by the time you pass away, there will be less money left in the annuity. 

Both of these ways of increasing your death benefit can result in your loved ones receiving a much larger financial payout.  

The larger payout could also help by contributing to or covering taxes on your estate as well as your funeral and burial costs.  

However, as these methods are expensive, it’s worth considering whether you really need them, especially if you have other assets such as cash, investments, life insurance, or real estate that you can bequeath to your beneficiaries. 

What is an annuity death benefit rider? 

The market-linked and annual increases described above are two examples of riders. Annuity death benefit riders increase the value of the annuity. 

A variety of riders are available in addition to those mentioned above. For example, you can find riders that cover long-term care in nursing homes after retirement, which can be helpful if you don’t have a separate long-term care insurance policy.  

When deciding how to structure your annuity and death benefit, consider all your other financial tools and how they work together. The important thing is to ensure all your bases are covered without paying more for the individual tools than is needed.  

Get expert financial advice 

An annuity death benefit that gives the remaining assets in your annuity to loved ones can be a wonderful way to leave a financial legacy for those people. Thanks to riders such as market-related or annual increases, you have the option of increasing the benefit.  

Whether you want to keep things simple or increase your death benefit, it’s important to speak to a professional who can help guide you.  

Match with a financial advisor through Unbiased for expert financial advice


Unbiased team

Our team of writers, who have decades of experience writing about personal finance, including investing and retirement, are here to help you find out what you must know about life’s biggest financial decisions.