What Is a Cash Refund Annuity?
A cash refund annuity returns to a beneficiary any sum left over should the person who purchased the annuity—called the annuitant—die before breaking even on what they paid in premiums.
Such a provision is typically included as a rider on a life annuity (also known as a "pure life annuity" or "straight life annuity"). It stipulates that if the annuitant passes away before the annuity payments received equal the annuity payments made, the annuity writer or insurance company will pay the difference to a named beneficiary, which is usually a spouse.
Typically, a cash refund annuity will cost the annuity buyer more in premiums. For the annuity writer—usually an insurer—it is a valuable tool for persuading individuals to buy an annuity. A cash refund annuity is also referred to as a "life with cash refund annuity."
Key Takeaways
- A cash refund annuity is what is returned to a beneficiary when the annuitant has died prior to receiving what they paid in premiums.
- A cash refund annuity is usually included as a rider.
- Depending on the type of annuity, payments continue to the beneficiary or stop when the annuitant dies.
How a Cash Refund Annuity Works
Annuities are used to guarantee a constant stream of income over a specified period of time. Depending on the annuity features, the payments will either continue (such as in a life annuity) or stop when an annuitant dies.
In a cash refund annuity, the annuity holder's beneficiary receives a lump sum. For example, assume a retiree purchases an annuity for $100,000 and receives $60,000 in annuity payments before passing away. The beneficiary, in this case, would receive $40,000 as a lump sum cash refund from the insurance company.
An installment refund annuity would return the $40,000 in payments over a period of time instead of a lump sum. Because of the time value of money, a life annuity with an installment refund will generally pay a slightly higher guaranteed benefit to the original annuitant as compared to a life with cash refund annuity, which features a lump-sum payment.
Types of Cash Refund Annuities
A cash refund feature in an annuity can take many forms. For example, under a Single Premium Immediate Annuity (SPIA), an individual may choose to structure their annuity as life with a cash refund or joint-life with a cash refund.
In a life with cash refund annuity, payments are made until the annuitant dies. If any balance remains between the sum of the premium payments and the sum of the payouts, that remainder is paid to the annuitant's beneficiary.
A joint life with cash refund annuity works the same way, except that it continues to make payments until both named individuals die (usually both spouses), then will pay any leftover balance to a named beneficiary.
In such an annuity option, the payments due to the surviving spouse may be the same as if both spouses were still alive. The payments might also be lower if the annuity was structured to provide a greater payment while both spouses are alive at the cost of a lower payment after one spouse dies.
FAQs
A cash refund annuity is what is returned to a beneficiary when the annuitant has died prior to receiving what they paid in premiums. A cash refund annuity is usually included as a rider. Depending on the type of annuity, payments continue to the beneficiary or stop when the annuitant dies.
What is a cash refund? ›
A cash refund transaction records the return of money to a customer who immediately paid for goods or services using cash, a check or a credit card.
How does cashing an annuity work? ›
Selling an Annuity
Another way to cash out your annuity is to sell your contract to a third-party company. Instead of a surrender charge, you'll be subject to a discount rate. The company will knock anywhere from 9% to 18% off the value of your annuity and pay you that amount in cash to buy the contract from you.
How do I get my money back from an annuity? ›
If you don't want to pay a surrender fee, look into whether you can take out money on an annual basis (subject to a certain limit.) Some annuities will allow you to withdraw a set percentage from the contract each year without the surrender charge coming into play, since you're not cashing it out completely.
What are the two types of refund life annuities? ›
The two types of refund life annuity payout options are cash refund and installment refund.
What is an annuity refund? ›
A refund annuity is a form of periodic payment that provides for refund to a beneficiary in the event the annuitant dies before the total compensation has been paid.
What happens during a refund? ›
You usually get a refund in the same way you paid for the item. For example, if you paid by cash, you should get either cash back or a gift voucher, and if you paid by direct debit, the money will go back into your account.
What happens when you cash out an annuity? ›
Closing or cashing out an annuity altogether—simply pulling out all your money and shutting down the contract—is an option if you need all of the funds. However, this process may also come with surrender charges, tax implications and the 10% federal tax penalty.
What does it mean to cash out an annuity? ›
Ways to cash out an annuity include withdrawal, loan, return of premium, surrender and with a crisis waiver. Cashing out an annuity has pros — access to immediate cash and potential tax advantages — but also cons including surrender charges, taxes, penalties and loss of future income stream.
Is cashing out an annuity considered income? ›
Because annuities grow tax-deferred, you do not owe income taxes until you withdraw money or begin receiving payments. Upon withdrawal, the money will be taxed as income if you purchased the annuity with pre-tax funds.
The installment refund option guarantees that the total annuity will be paid to the annuitant or the annuitant's beneficiary. The difference here is that the remaining principal will not be paid to the beneficiary in a lump sum as the cash refund payout does.
Can I get a cash refund on life? ›
Yes, you can get money back in term life insurance, However, a certain variant of term insurance gives back money, unlike the regular term plan, which only provides death benefits. Let's understand all about money-back term life insurance, its key features and how it differs from a regular term insurance plan.
What is a modified cash refund annuity? ›
Definition of modified cash refund annuity
When employee participants die before receiving all of their contributions in the form of retirement benefits, this type of annuity guarantees to repay the remainder of those contributions, with interest, to the beneficiaries.
Is a cash refund debit or credit? ›
Recording a Cash Refund
You will first debit your Sales Returns and Allowances account with the amount of cash given to the customer. Then you credit your cash account. While cash returns are not as common as a credit return, they do happen and it is important to correctly record those transactions.
Is cash back your own money? ›
Many rewards credit cards offer cash back, and you may even find some debit cards that offer cash back on certain purchases. Cash back is not free money, but rather a reward for making purchases on expenses like gas, groceries, restaurant meals or even streaming services.
Is cash refund an expense? ›
A refund is a special type of expense transaction because it reduces your business expenses (as though the original purchase was for a lesser amount). It should not be recorded as revenue.
Do you have to give a cash refund? ›
However, this is shop policy and represents a gesture of goodwill – it is not a legal requirement. Moreover, the shop's policy may be to issue such refunds in the form of a credit note or a gift voucher for the shop. As a result, make sure that the item is something you really want before you hand over your money.
