How a Cash Refund Annuity Works

An annuity income rider is a powerful addition to your retirement planning toolkit that can provide financial security when you need it most. These optional benefits attached to annuity contracts guarantee a lifetime income stream, regardless of market performance or how long you live. By separating your income base from your actual account value, income riders offer predictability in an unpredictable financial landscape.

A financial advisor can help you figure out if annuities are a good fit for your retirement.

What Is a Cash Refund Annuity?

A cash refund annuity addresses the major concern of annuity investors of what happens to their investment if they pass away quickly. In traditional annuities, if the account holder dies, the monthly payments stop and their investment is turned over to the insurance company. With a cash refund annuity, if you’ve received less than your original investment amount, the difference is given to your beneficiaries as a death benefit.

Cash refund annuities work just like a traditional annuity while the account holder is alive. In exchange for a lump sum of money, you’ll receive a monthly stream of income for the rest of your life. However, if you pass away before receiving at least your original deposit, then the difference is provided to your beneficiaries.

Let’s say that you purchase an annuity for $100,000. Before passing away, you receive a total of $70,000 in monthly payments from the insurance company. A cash refund annuity will provide your beneficiaries with a payout of $30,000. By comparison, a traditional annuity would not provide them with anything.

Because of this guaranteed payout from the insurance company, the monthly payment amount will be lower than a traditional annuity.

Types of Cash Refund Annuities

Cash refund annuities offer a safety net for those concerned about losing their investment if they pass away early. These financial products ensure that beneficiaries receive the difference between the premium paid and what the annuitant collected during their lifetime, providing peace of mind for retirement planning. There are three main types of cash refund annuities to understand.

1. Single Life With Cash Refund

A single life annuity with cash refund provides income payments for one person’s lifetime. If the annuitant passes away before receiving payments equal to their premium, the difference is paid to their beneficiaries in a lump sum. This option offers peace of mind that your investment won’t be lost if you die earlier than expected, while still providing guaranteed lifetime income.

2. Joint Life With Cash Refund

A joint life with cash refund annuity is very similar to a single life with cash refund annuity. The major difference is that the monthly payments will continue for as long as both annuitants are alive. If both account holders pass away before the original investment has been paid out, then their beneficiaries will receive the difference. Because a joint annuity is based on the lives of two people, the monthly payment is generally less than a single life annuity.

3. Installment Refund Annuity

With cash refund annuities, beneficiaries generally receive a lump sum payment if the annuitant passes away before breaking even on their annuity. Installment refund annuities spread out that lump sum over time. Because this feature allows the insurance company to spread out the payments, the monthly annuity payment to the account holders is generally higher while alive.

Alternatives to Cash Refund Annuities

When considering a cash refund annuity, it pays to evaluate other options. Depending upon your age, gender, investment amount, current interest rates and other factors, other options may be more appealing

Period Certain Annuities: These guarantee payments for a specific timeframe, regardless of whether the annuitant lives or dies. If the annuitant passes away during this period, payments continue to a beneficiary until the period ends. This option provides predictability in planning for a set number of years.
Life Annuities with Installment Refunds: Similar to cash refund annuities, these ensure beneficiaries receive the difference between premiums paid and payments received, but distributed as continued installments rather than a lump sum. This provides a steady income stream for beneficiaries rather than a one-time payment.
Joint and Survivor Annuities: These continue payments as long as either of two named individuals (typically spouses) remains alive. The surviving individual may receive the same payment amount or a reduced percentage, depending on the contract terms. This option is ideal for couples wanting to ensure income security for both partners.
Deferred Income Annuities: These allow you to invest now for income that begins at a future date, often offering higher payment rates due to the deferral period. They can be structured with various death benefit options to protect beneficiaries. This alternative works well for those planning for retirement needs.
Variable Annuities with Death Benefits: These investment-based annuities offer growth potential while including guaranteed death benefits that protect your principal or lock in investment gains. Beneficiaries receive either the account value or the guaranteed minimum, whichever is greater. This option combines growth opportunity with beneficiary protection.

Bottom Line

Traditional annuities require you to convert your account balance into a monthly stream of income. This conversion does not provide any assurances of how much you (or your estate) will get back. If you pass away quickly, you’ll have received only a fraction of your original investment amount. A cash refund annuity addresses that concern by ensuring that you and your beneficiaries receive at least the amount of your original investment.

Tips for Retirement

Working with a financial advisor provides more options to investors. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Annuities are a popular choice for retirees because they offer guaranteed income. Our retirement calculator will help you determine how much money you’ll need in retirement to pay your bills and enjoy your favorite activities.