Installment refund annuity: Balancing income with inheritance

An installment refund annuity can be a smart way to get guaranteed income while protecting your original contribution. If you pass away before receiving the full value of your premium, your beneficiaries receive the remaining balance. This type of annuity blends income security with legacy planning. 

Read on to learn more about installment refund annuities. We’ll show you how they work and the pros and cons of adding one to your retirement plan.

What is an installment refund annuity?

An installment refund annuity is a lifetime income product. Sometimes called a refund life annuity or refund annuity option, it ensures you or your beneficiaries get back at least what you paid into the contract.

You’ll receive payments over your lifetime, but if you die before the full principal is returned, your beneficiaries collect the remaining balance. Insurance companies usually offer this as a rider or payout option added to a life annuity.

Installment refunds are somewhere in between life-only and period-certain annuities: 

• Life-only annuity: This option stops payments when the annuitant dies, even if they’ve received less than they contributed. 
• Period-certain annuity: This guarantees payments for a set number of years — passing them to beneficiaries if the annuitant dies early. Payments may end even if the insurer hasn’t returned the full principal.

With an installment refund annuity, you receive lifetime income while also protecting your original premium if life ends sooner than expected.

Installment refund annuity: How it works

Here’s a closer look at how installment refund annuities go from purchase to payout. In this example it is assumed you are both the buyer and the annuitant. 

• Purchase and payout selection: Buy your annuity with a lump-sum premium, and then choose the “installment refund” payout option. Note that this is not always available and varies by product and/or carrier. The insurer will calculate your monthly (or periodic) income based on various factors such as your age, how much you invested, and current interest rates.
• Payments to the annuitant (income phase): Each installment returns a portion of your original principal along with any earnings. Even if you outlive the amount you initially contributed, the payments continue for life.
• Death and beneficiary installment payments (refund phase): If you die before you receive the full value of your premium, the insurer pays any remaining principal to your beneficiaries in installments. That way, none of your principal goes unused.
• Contract end and accounting:  If you receive all of your premium back then payments would stop at your passing and the contract ends with your life. If you didn’t receive all the initial premium back before passing, payments would continue to the beneficiaries until the premium was returned and then the contract would end. 

Types of refund annuities

There are two main types of refund annuities. Each guarantees your beneficiaries receive the remaining value of your initial contribution, but they pay out differently.

Cash refund

If you pass away early, a cash refund returns any unpaid portion of your principal in a lump-sum payment to your beneficiaries. This provides immediate financial support and simplifies the annuity payout. But because the insurer might pay a large amount all at once, monthly income to the annuitant is typically slightly lower than with other options. This can also have a larger tax implication for the beneficiary. 

Installment refund

An installment refund makes regular payments to your beneficiaries until the insurer has repaid the full principal. This gives you more financial stability than a single payout. Since the insurance company pays the refund gradually, you typically receive slightly higher monthly income compared with a cash refund annuity.

Cash refund life annuity vs. installment refund annuity

Here’s a look at the differences between these two refunds.

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Both refunds protect your principal, but they serve different needs. The choice comes down to your financial goals and how you want any leftover funds passed on to your beneficiaries.

Installment refund annuity taxes and beneficiary rules

The insurer divides your annuity payments into two parts:

1. The portion that represents a return of your original principal, which isn’t taxable – if it was funded with after tax dollars. If funded with pre-tax money or is a “qualified” annuity, the whole amount is taxed as ordinary income.
2. The portion that counts as earnings (in the after tax funding method) and is taxed as ordinary income.

If your beneficiaries receive a lump-sum payment, they might have to pay income tax on all the earnings in the same year — which can be a lot to handle. With installment refunds, taxes apply gradually to each payment so they can be easier to manage and plan for.

Who should consider an installment refund annuity?

An installment refund annuity isn’t for everyone, but it can make sense in certain circumstances. For example, if you’re worried a loved one might quickly spend a lump-sum inheritance, installments can help them manage their money more responsibly.

This type of annuity also works well when you have limited assets to leave behind. It guarantees any remaining principal helps your beneficiaries after your death.

A better way to grow your money with Gainbridge

Whether you’re unsure about a lump-sum payout or you just want a more predictable way to support your beneficiaries, an installment refund annuity can offer peace of mind and financial stability for you and your family. 

At Gainbridge, we’re changing the annuity process. Our online platform lets you buy direct, getting rid of broker commissions and fees and putting power (and typically higher interest rates) into your hands. Visit our website and start exploring how annuities can help protect and grow your savings.

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This article is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional. The Gainbridge® digital platform provides informational and educational resources intended only for self-directed purposes. Guarantees are backed by the financial strength and claims-paying ability of the issuer.

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