Legal Definitions - cash-refund annuity

A cash-refund annuity is a specific type of financial contract, typically purchased from an insurance company, designed to provide a stream of regular payments to an individual (known as the annuitant) for a set period or for the rest of their life. The defining characteristic of a cash-refund annuity is a built-in guarantee: if the annuitant dies before receiving total payments that equal the original amount they paid for the annuity, the remaining balance of that initial investment is paid out as a lump sum to their designated beneficiaries. This feature ensures that the full principal amount invested in the annuity is returned, either through payments to the annuitant during their lifetime or to their heirs after their death.

Here are some examples to illustrate how a cash-refund annuity works:

• Example 1: Protecting an Inheritance

  Maria, a 70-year-old retiree, purchases a cash-refund annuity for $200,000 to ensure a steady income stream during her retirement. She designates her two adult children as beneficiaries. The annuity is set to pay her $1,000 per month. After receiving payments for five years (totaling $60,000), Maria unexpectedly passes away. Because she had only received $60,000 of her initial $200,000 investment, the remaining $140,000 is paid as a lump sum to her children. This example demonstrates how the cash-refund feature ensures that the original investment amount is fully returned, either to the annuitant or their heirs.

• Example 2: Joint Retirement Planning

  John and Sarah, a married couple, invest $350,000 in a cash-refund annuity to supplement their retirement income. They set up the annuity to pay them jointly, with the understanding that if one passes away, the other continues to receive payments. They name their grandchildren as ultimate beneficiaries. After receiving payments for eight years, totaling $120,000, John passes away. Sarah continues to receive payments. A few years later, after total payments have reached $250,000, Sarah also passes away. Since the total payments received ($250,000) are less than the initial $350,000 investment, the remaining $100,000 is paid out to their grandchildren. This illustrates how the cash-refund feature protects the principal investment across multiple annuitants and ensures the remainder goes to the designated heirs.

• Example 3: Structured Settlement Assurance

  David receives a $500,000 structured settlement from a personal injury lawsuit. To manage the funds and ensure a long-term income, he uses the entire amount to purchase a cash-refund annuity, with his sister as the beneficiary. The annuity is designed to pay him $2,500 per month. Tragically, David dies in an unrelated accident just two years after the payments begin, having received only $60,000 in total. Under the terms of the cash-refund annuity, the insurance company pays the remaining $440,000 of the original principal to David's sister. This scenario highlights how the cash-refund provision guarantees that the full initial investment, even if from a settlement, is ultimately distributed, regardless of how long the annuitant lives to receive payments personally.