Guaranteed minimum death benefit

A guaranteed minimum death benefit (GMDB) protects an annuity's beneficiaries from market losses. Most variable annuities include a basic version: if the owner or annuitant dies before income payments begin, the beneficiary receives the greater of the account value or total premiums paid, adjusted for withdrawals. Optional riders add richer versions for an extra annual fee.

The common enhanced designs are a ratchet, or step-up, which locks in the highest account value on a contract anniversary, and a roll-up, which grows the guaranteed amount at a set rate, such as 5% a year, up to an age or cap. Say, hypothetically, you invest $200,000, the account peaks at $260,000 on an anniversary, then falls to $180,000 when you die. A return-of-premium GMDB pays $200,000, while an annual ratchet pays $260,000.

The guarantee pays only at death and usually ends once the contract is annuitized; it can't be withdrawn while you're alive. Withdrawals can reduce it proportionally, which after a market drop may shrink it by more than the dollars taken out. Weigh the rider charge against simply owning life insurance. See variable annuities: how they work, what they cost, who they suit and what happens to an annuity when you die.