Cash Refund Annuity

DEFINITION of 'Cash Refund Annuity'

An annuity contract that returns funds back to a beneficiary in the event that the annuitant dies too early. A cash refund annuity has a provision which stipulates that if the annuitant passes away before the annuity payments received equal the annuity payments made, the insurance company will pay the difference to the beneficiary. Some variations might include the addition of interest earned on top of the difference.

BREAKING DOWN 'Cash Refund Annuity'

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 or stop when you die. In a cash refund annuity, your 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.