In today’s market for financial products, the array of life insurance and annuity options that are available can seem staggering at times, especially for clients whose primary goal is to provide pure life insurance protection, whether business or personal. For these clients, the costs and complications required to secure many of the bells and whistles that can accompany today’s most valuable life insurance products may deter life insurance planning entirely.
Fortunately, the reversionary annuity is gaining traction among carriers — as a product that combines features of both annuities and life insurance in order to provide guaranteed income to survivors — but with modifications that allow it to be stripped of the high-end price tag that often accompanies the modern financial product.
Reversionary annuities: the basics
A reversionary annuity is a type of combination annuity-life insurance product that a client purchases (by paying premiums over time) in order to provide a set benefit to a specified beneficiary after his death. The death benefit is also paid out to the beneficiary over time, whether monthly or annually, for the remainder of his lifetime in order to ensure that the survivor’s income needs are met. In most cases, the beneficiary is chosen when the policy is purchased and cannot be changed.
Reversionary annuities do not provide any access to the value of the policy during the client’s lifetime, so cannot be used as a source of retirement income. The real value of a reversionary annuity is that the beneficiary cannot outlive the income that the death benefit will provide, as would be possible with a traditional lump sum life insurance death benefit. This protects against the possibility that the beneficiary will make poor financial decisions and end up with insufficient income later in life.
As is the case with a traditional annuity, the beneficiary receives the value of the premium payments (the investment in the contract) tax-free, and interest that is earned is taxed on a pro rata basis over time.
A lower price point
Reversionary annuities are typically much less expensive than a traditional life insurance policy because a reversionary annuity has value only if the beneficiary outlives the policy owner. If the beneficiary predeceases the policy owner, the policy is terminated and no death benefit is paid out.
Further, the cost of the policy is based upon the medical histories and life expectancies of both the policy owner and the beneficiary. If the beneficiary has a much longer life expectancy than the policy owner (as would likely be the case if a parent purchased the policy for the benefit of a child), the premium cost generally increases. Conversely, if it is likely that the beneficiary will live for a relatively short period following the policy owner’s death (as may be the case with a spousal beneficiary), the premium cost will be much lower.
Additionally, because the policy is paid for over time, a reversionary annuity may provide a much more affordable option than a traditional annuity, which often requires a significant up-front premium payment to fund the entire cost of the contract. As a result, a reversionary annuity may provide an insurance option even to clients who are otherwise unable to fund the cost of a traditional annuity or life insurance policy.
Even though a reversionary annuity may not provide the investment-type qualities that many clients have come to expect from a life insurance policy, for other clients this type of product can play a crucial role in providing additional security — in a form that the client’s survivors cannot outlive.
For previous coverage of planning for guaranteed income in Advisor’s Journal, see GLWBs and LIBRs—Which Rider Fits?
For in-depth analysis of annuity planning, see Advisor’s Main Library: Types of Annuities.
Your questions and comments are always welcome. Please contact the Panel of Experts.