What is an Annuity Forfeiture?

Planning for retirement is crucial to ensuring that you will be able to provide yourself with a level of comfort when you are no longer working. One such investment tool many utilize to ensure a steady cash distribution is by arranging an annuity with a life insurance company. Individuals make a contract with an insurance company where the individual pays regular premiums until a set date that the annuity starts providing the policyholder with payouts. Annuities can be a good investment tool, but in some circumstances a pure life annuity can result in a forfeiture of investments.

Annuity Forfeiture Basics

In the case of an annuity, a forfeiture is when the annuitant dies earlier than anticipated, thus resulting in the annuity payments subsiding. If you invest in a pure life annuity to begin paying you at a certain age and you die only after a couple of months or years of payouts, the remaining money is lost to your heirs. With a pure life annuity, the payouts cease when the annuitant dies and the rest of the money becomes the property of the insurance company.

Preventing Annuity Forfeiture

By opting into adding a clause to your annuity policy, the chances of forfeiture can be mitigated. Riders can be added to your annuity contract stating that your benefit payout must occur for a certain period of years. For example, say you set up an annuity to pay out at 65 and add a clause to be paid for at least a total of 10 years. Even if you die at age 70, your heirs will be entitled to the additional five years of benefits as that would be part of the contract terms. If you live past the 10 years, your payout benefits will continue as scheduled per the original terms of the contract.

When it comes to establishing an annuity account for yourself, it is advisable to speak to a professional in the field. As long as you know to ask about annuity forfeitures, they can help you set up an account to help lower the risk of this occurring in the future.