Many people facing retirement are not aware of an option which may dramatically increase income, not only to them but also to their surviving spouse.

A few highly rated carriers are offering a life insurance product with a predefined lifetime income death benefit, rather than a lump sum, payable to the beneficiary. This design makes planning much easier for families when income is lost.

Here is an example. Through careful savings, Andrew had accumulated a significant balance in his company’s pension plan. Now, at age 65, Andrew is about to retire. He has narrowed his decision to taking either a $4,800 lifetime monthly income for his lifetime, or a $3,600 joint and survivorship option (where his spouse, now also age 65, continues to receive 100% of his retirement income should he predecease her).

It is important for Andrew to ensure his wife receives at least this $3,600 per month after his death. No option seems to exist other than to reduce retirement income while he is alive by 25% (from $4,800 to $3,600). That is until Andrew discovers some recently introduced life insurance products called reversionary annuities.

The reversionary annuity allows his wife to be the beneficiary of a death benefit equal to $3,600 per month for the rest of her life, payable beginning when Andrew dies. The monthly premium for this policy depends upon Andrew’s health, just as with many other life policies, the premium can start as low as $500 for a nonsmoker and start as low as $1,000 for a smoker.

This reversionary annuity gives Andrew the ability to select the $4,800 option from the company, while ensuring that $3,600 per month will be provided to his wife should he die first (see chart).

In addition to offering the couple $700 more per month than possible under the joint and survivor option, the reversionary annuity permits most of the $3,600 payable to the wife to be considered an income tax free death benefit. After income tax, this is likely to provide Andrew’s wife with a significant financial advantage.

Here are some other points to keep in mind about reversionary annuities:

o While other life insurance products provide a lump sum death benefit that may be exchanged into an income stream by the beneficiary, there is no certainty as to the amount this income stream will provide at the time the policy proceeds are paid. The reversionary annuity guarantees the monthly income will commence to the surviving beneficiary irrespective of the date of the insured’s death.

o There is typically no cash surrender value provided within reversionary annuities. This helps keep the premium low.

o Insureds who are highly rated will commonly find this product not to be advantageous when compared to choosing a joint and survivorship option.

o In its basic form, the reversionary annuity provides no benefit if the beneficiary dies prior to the insured. However, there are also many flexible choices which may be considered when purchasing a reversionary annuity.

Some of these options include: return-of-premium option, in the event the beneficiary dies prior to the insured; limited pay scenarios (so the policy can be paid-up sooner); minimum period certain for benefit payments; inflation protection, where the benefit to the beneficiary increases annually (beginning at policy issue or time of claim); accelerated benefits to provide a larger payment immediately upon death of the insured or acceleration of payments to the owner upon chronic/terminal illness of the insured; reduced monthly benefit if the owner is unable/unwilling to pay the scheduled premium; guaranteed purchase option to lock in premium, if before retirement; and waiver of premium rider.

When lost income needs to be replaced, it is always an advantage to be able to offer an individual a product that is flexible, income-enhancing, and tax-advantaged. With a reversionary annuity, the retiree can have all three–enjoy an appreciated income stream, have much-needed flexibility, and potentially generate an attractive after-tax income to a surviving spouse.