To Leave an Inheritance, Combine Annuity and Life Insurance
If I buy an immediate annuity, can my heirs get anything after I die?
In the most common form, in exchange for a lump sum payment on your part, the insurance company that issues an immediate annuity will send you a check for the rest of your life. But if you select the so-called "single life only" option, payments stop when you die and your heirs get nothing.
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So what can you do if you don't want to disinherit your loved ones?
Basically, you have two options. One is to structure the annuity payments so they continue after you die. The second is to buy life insurance to replace the money you used to buy the annuity.
If you choose the first option, you typically have several choices. Here are some of the most common:
You may, for example, elect a "single life with a guaranteed period." That means the insurance company will make payments for a specified number of years even if you die earlier. The payments will go to the person you designate after you die.
Or you may select a "joint and 100 percent survivor, life only" option, meaning that payments will continue until both you and a beneficiary die. The beneficiary is usually a spouse, but can be anyone. When the second person dies, payments stop.
If you want to protect both spouse and children, you may elect a "joint and 100 percent survivor with a guaranteed period." Payments would continue to your children or anybody else you designate if both you and your spouse die before the end of the guaranteed period.
Naturally, the more guarantees you want, the lower the payments. Based on recent quotes from a top-rated insurance company, a 70-year-old man buying an immediate annuity for $100,000 would receive $757 a month for life on his life only; $705 a month on his life with 10 years certain; $604 a month on a joint and 100 percent survivor option with a 70-year-old spouse; and $600 a month on a joint and 100 percent survivor option with that spouse and 10 years certain.
Another option, attractive for healthy annuity buyers 70 and older who have enough resources and want to leave an inheritance, is to buy life insurance.
The strategy works because the annual premiums on an insurance policy, particularly if you are healthy enough to qualify for "preferred" rates, can be considerably less than the annual income the death benefit amount would produce if used to buy an annuity.
Here is an example provided by Howard Baron and Michael Silver, certified financial planners with Baron Silver Stevens Financial Advisors LLC in Fort Lauderdale.
We had heard about annuities and were investigating them for our IRAs. We also heard bad things about pushy brokers over the years. So when we went to the ImmediateAnnuities.com site we were skeptical about calling them. But whenever we called their staff was really friendly. They answered all our questions and one of their reps even told us that at our ages there was no advantage to buying the annuity with our IRAs. These guys are really honest!
Take a 75-year-old man who buys a $1 million immediate annuity that pays him $9,083.33 a month for life, or $109,000 a year. Because most of the annuity payments are considered a return of principal, taxes would be $10,300 at most even if the man is in the top 35 percent bracket, leaving him with $98,700 of after-tax income.
From that, the man takes $33,500 to pay the annual level premium on a $1 million life insurance policy for life. That leaves him with a net after-tax income of $65,200 a year, or a 6.52 percent after-tax return on the annuity premium, far more than he could get in traditional fixed-income investments today. The heirs would get back the $1 million, income-tax free, when he dies. And if the life insurance policy is owned not by the man but by an irrevocable trust, the $1 million would not be considered part of the man's taxable estate.
"This strategy gives the retiree more guaranteed income, while incurring less income and estate taxes, and there are more assets available for the heirs at the retiree's death," Baron said.
Provided your health is good enough to get insurance and favorable premiums, the strategy works better after age 70. "We start looking at this for people over 70 and get really serious after age 75," Silver said. Generally, life insurance policies are sold up to age 90.
To consider this strategy, a retiree also should have a fair amount of savings. "I would not want to get involved for anybody with less than $300,000 in liquid assets," Silver said, not only because of the amount needed to pay the life insurance premiums but also because, regardless of the amount of assets a retiree has, it's not a good idea to put all of one's money in an immediate annuity and give up access to principal.
Source: sun-sentinel.com - 02-08-2004