Email FacebookTwitterMenu burgerClose thin

How a Cash Refund Annuity Works


Couple talks to an annuity saleswomanAnnuities are a valuable tool for retirement income. They turn your account balance into a stream of monthly payments that an investor cannot outlive. However, the major downside to an annuity is that, if the account holder passes away quickly, most beneficiaries do not receive anything. A cash refund annuity addresses this issue by making sure that the estate breaks even on the amount invested in the annuity. 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 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

There are three main types of cash refund annuities – single life, joint life and installment refund.

Single life with cash refund

A single-life with cash refund annuity is an annuity that is based on one person’s life. The monthly income will continue for as long as this person is alive. If they die before receiving at least what they’ve put into the annuity, the difference is paid to their beneficiaries.

Joint life with cash refund

Umbrella concept graphicA 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.

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 a period of 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

  • Annuity with period certain. A “period certain” annuity provides income payments for the life of the account holder. If they die before a certain number of years (e.g. 10 years), then the beneficiaries will continue to receive monthly payments for that timeframe. You may not receive your full contribution back, but you’ll have some financial assurances against early death.
  • Deferred annuity with guaranteed lifetime withdrawal payment. Rather than annuitize your account, consider a deferred annuity. With this account, you can keep your balance flexible and withdraw money from your balance regularly. With this optional rider, you can withdraw from your annuity without penalty and the account balance passes on to your beneficiaries when you die.

The Bottom Line

"ARE YOU COVERED?"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 qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one 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.

Photo credit: ©, ©, © Frazao