What Are Guaranteed Minimum Death Benefits?

November 1, 2019

If a contract owner dies in the accumulation phase, a deferred annuity contract will, at a minimum, pay the accumulation value to a named beneficiary. Sometimes the contract may be continued by the beneficiary, with the beneficiary as the new owner. The contractual payout of this benefit varies by policy and can be payable as a lump-sum payment or as periodic annuity payments.

Most, but not all, variable annuity contracts provide a standard Guaranteed Minimum Death Benefit (GMDB) during the accumulation period equal to the greater of (a) the contract value at death or (b) premium payments minus any prior withdrawals. The “return of premium,” or ROP, GMDB gives contract owners the confidence to invest in the stock market, important in keeping up with consumer inflation, as well as the security of knowing their families will be protected against financial loss in the event death occurs as a time when the account value has incurred losses due to negative market returns.

Beyond ROP there are also several types of enhanced GMDBs that provide additional growth and/or protection of account value. The different types of enhanced GMDBs are described below, some of which have additional associated charges.

Contract Anniversary Value or Ratchet

Some life insurance companies offer death benefits that step up or increase based on pre-determined criteria. Called contract anniversary value or ratchet, these enhanced GMDBs are equal to the greater of (a) the contract value at death, (b) premium payments minus prior withdrawals, or (c) the contract value on a specified prior date. The specified date could be a prior contract anniversary date, such as the date at the end of every seven-year period, every anniversary date, or even more often. A ratchet GMDB locks in the contract’s gains on each of the dates specified.

Initial Purchase Payment With Interest or Rising Floor

Some insurers offer a rising floor GMDB that is equal to the greater of (a) the contract value at death or (b) premium payments minus prior withdrawals, increased annually at a specified rate of interest. In some cases, a ratchet and a rising floor may be available within the same contract. Some contracts offer a choice of a ratchet or a rising floor. Though they have become less common and more expensive in recent years due to low interest rates, they are still available.

Enhanced Earnings Benefits

Not all variable annuity death benefits are associated with protection against falling markets. Many variable annuity contracts offer enhanced earnings benefits (EEB) that provide a separate death benefit to help offset federal and state income taxes payable upon death on any gains in the contract. With this feature, beneficiaries receive not only the base death benefit amount, but also an additional amount that is usually equal to a percentage of the contract’s earnings at death, e.g., 40 percent.

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