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.