by John Darer CLU ChFC MSSC RSP CLTC
A life annuity is an annuity that makes periodic payments to the payee for the rest of their life.
What happens with a life annuity if you die?
If you have an annuity that is for life only, the payments cease when you die. This is obviously a less desirable choice if you have beneficiaries.
Why would anyone want a life annuity?
Where longevity risk is a concern a life annuity is appropriate. “Not only are investors getting less return on their safe bond investments,” says Dr Michael Finke, Dean and Chief Academic Officer at The American College of Financial Services “They’re also living longer, so they need to fund more years of spending. The bottom line is that retirement is just more expensive today than it was in the past.” **
It's difficult to predict exactly when the end of your life will be. You can look at the mortality tables. You can take a guess based on the longevity of your parents and grandparents. Unless your toes are turning blue, your veins are mottling and you can be observed in a Cheyne-Stokes breathing pattern, it's an educated guess. A life annuity puts you on the life insurance company's figurative "payroll" until you die. With a life annuity you cannot be fired no matter how old you get. For many that is a great sense of comfort.
A life annuity is also appropriate if the paying party in a lawsuit or dispute has a lifetime obligation to pay but the obligation ceases at death.
How Do You Provide For Beneficiaries When Establishing a Structured Settlement Annuity or Retirement Income Annuity?
There are a variety of ways to provide for beneficiaries of life annuities with structured settlement annuities or retirement annuities:
Add a certain period. A certain period provides that paymnets will be paid for life, but at least for a minimum certain period of time whether or not the payee is alive when the payment is due. So if there are monthly paymnets for life with 25 years certain it means that payments will be made for 25 years (300 monthly payments) whether or not the payee is living and then only if the payee is living from month 301 onward.
Add a certain period and a commutation rider A commutation rider provides for the payment of a lump sum at the death of the payee instead of ongoing payments. Depending on the life insurance company, the commuted lump sum is generally between 90-95% of the present value of any remaining certain payments discounted as of the date of death and in accordance with a formula set forth in the annuity contract. A commutation ride must be selected at the the structured settlement is established. Also popular where a structured settlement is used as funding component of a special needs trust.
Buy Life Insurance A life insurance policy will provide an income tax free lump sum at the death of the insured. This is only an option if the annuitant is insurable, but at certain ages, where the annuitant is a good risk, it may be a more effective solution than adding a certain period whose value diminishes the longer a person lives. Underwriting is required.
Installment Refund The annuity pays for life but guarantees that at least the amount of the premium will be paid out. If the annuitant dies prior to the amount of premium being paid out, the balance of the premium amount is paid in installments.
Cash Refund The annuity pays for life but guarantees that at least the amount of the premium will be paid out. If the annuitant dies prior to the amount of premium being paid out, the balance of the premium amount is paid in a lump sum.
Each of these options has a cost factor that needs be evaluated against financial resources and the unique set of facts and circumstances of each case.
** "How much do you need in retirement? More than you think" Feb. 7, 2017 USA Today