Annuities are the only investment vehicles that can guarantee investors that they will not outlive their income, and they do this in a tax-favored manner. In addition, annuities are available with a host of features to meet a wide variety of investor needs.
Related: Milevsky: Big flaw in DOL fiduciary rule; annuities take early hit
Keep reading for three frequently asked client questions about annuities, along with the answers to those questions.
Editor’s Note: This excerpt was taken from Tools & Techniques of Life Insurance Planning, which delivers detailed information about the entire range of life insurance products that can be used by estate and financial planners in a wide variety of circumstances. It includes planning techniques for retirement income needs, estate and gift tax avoidance, estate liquidity needs, and long-term care planning.
Question No. 1: What happens to the money paid to the insurance company when the annuitant dies?
Answer: A pure life annuity is one in which the continuation of payments by the insurer is contingent upon the continuing survival of one or more lives. The remaining consideration (premium) paid for the annuity that has not been distributed (including accrued interest) is fully earned by the insurer immediately upon the death of the annuitant. This is why annuities payable for the life or lives of one or more annuitants frequently include a minimum payment guarantee. In other words, many annuities include both life and fixed period or refund elements so that if death occurs prematurely, the annuitant and the annuitant’s survivors will recover a total of at least some minimum amount. Therefore, each annuity payment where a minimum guarantee has been purchased is composed of:
- Return of principal;
- Interest or earnings on invested funds; and
- A survivorship element.
If an annuitant dies before having recovered the full amount guaranteed under a refund or period-certain life annuity, the balance of the guaranteed amount is not taxable income to the refund beneficiary—until the total amount received tax-free by the annuitant plus the total amount received tax-free by the beneficiary equals the investment in the contract. From that point on, all additional amounts received are ordinary income.
DOL 101: The fiduciary rule’s impact on annuity carriers
Illinois court sees fixed indexed annuities as insurance
Question No. 2: What is a temporary life annuity?
Answer: A temporary life annuity is one which provides for fixed payments until the earlier of the death of the annuitant(s) or the end of a specified number of years. To compute the annuity exclusion ratio, expected return is found by multiplying one year’s annuity payments by a multiple from the appropriate IRS annuity table.
5 things to know about selling annuities under the DOL fiduciary rule