How Variable Annuity Living Benefits and Death Benefits Work

Annuity riders can be expensive. Watch out for features you don't need.

Senior woman using laptop to check on her variable annuity.
Living benefit riders can be great in a down market. Nick Clements/ Taxi/ Getty Images

A basic variable annuity offers tax-deferred growth, a selection of investments, and guarantees your original contribution amounts as a death benefit. Most variable annuities are not basic.

Today, extra features such as enhanced living benefits and death benefits are common. Here's how these features work.

Living Benefits

A living benefits rider offers some type of guarantee as to the amount of income you can withdraw while alive.


The purpose: A living benefit rider is intended to provide you with a safety net; a way of insuring your retirement income will be there when you need it. Like any form of insurance, there is a cost; typically in the range of .25% to 1.00% a year, which is in addition to the other fees and expenses inside the annuity.

To exercise these features, the annuity policy may require that you annuitize your policy (which simply means you would turn it into an immediate annuity), or you may be required to own the policy for a minimum number of years (such as ten years) before the rider can be used.

Many policies guarantee that something called your "benefit base" or "income base" will grow at a fixed rate of return. Then you can withdraw 4% or 5% of that income base at a specified age, and that withdrawal amount is guaranteed for life even if the investments don't perform well. Annuity buyers commonly mistake this income base for their account value.

The income base is an accounting entry; it is a phantom account. It is only used to calculate your allowable withdrawal amount.

Your actual account value is what you get if you cash in the policy. If the investments do well, your actual account value is likely to be higher than your income base; if the investments have not done well, your actual account value is likely to be less than the income base.

In a prolonged period of poor market returns the guaranteed income from the income base may prove to be a valuable feature that guarantees a portion of your retirement income. 

Living benefits can provide guaranteed retirement income, but you must make sure you understand what requirements you must meet to use the guarantees. A few questions to ask about your variable annuity:

  • How long do you have to own the policy?
  • What is the cost?
  • Can the rider be terminated (and the cost terminated) if you no longer need it?
  • Are you required to annuitize the contract to use the benefit?

Do not buy a policy with a living benefit until you understand how the benefit works, and when you can use it.

Enhanced Death Benefits

The basic death benefit offered by a variable annuity is a guarantee that upon your death the insurance company will pay your beneficiary at least the amount you put in. Doesn’t sound like much of a benefit, does it? That's why many annuities offer some form of an "enhanced" death benefit.

The purpose: An enhanced death benefit is designed to benefit your heirs. These features come in the form of death benefit riders that offer monthly or annual “step-ups”. For example, if the policy has a monthly step-up, then each month, on your policy anniversary date, the insurance company takes a snapshot of your account value.

Upon your death, the highest monthly value that was recorded becomes the death benefit amount - even if the market value is currently less. Most death benefits are reduced for any withdrawal amounts you may have taken.

These death benefit riders cost more than the basic death benefit. A death benefit rider that has a monthly step-up may cost anywhere from .25% - .50% of the account value per year. A cost of one half of one percent a year adds up when charged year after year.

Death benefit riders that offer monthly or annual step-ups can provide a way for you to lock in market gains to pass along to your heirs. If you cannot qualify for life insurance, and do not need to use the funds yourself, this can be a way to provide an extra benefit for beneficiaries, although the gain may not be passed along in as tax efficient a way as other alternatives.

If you have too many extra riders on your variable annuity, the fees can add up to 3.5% - 4% per year. High fees make it almost impossible for the investments to perform well enough to earn back the fees and grow. Be cautious of adding on features that you don't really need.