SPIA Structure: Life With Death Benefit
Annuities are life insurance and are issued by life insurance companies. However, annuities and life insurance are very different when you look closely at their unique value propositions. Annuities are used primarily as benefits while you are alive (aka: living benefits), while life insurance is utilized as a legacy strategy provided through the contractual death benefit. In addition, death benefit proceeds from a life insurance policy pass both tax-free and probate free to the beneficiaries. Annuities do not carry that same tax-free death benefit; the death benefit proceeds are taxable.
Why Would Someone Want to Attach a Death Benefit to a SPIA?
The short answer is lifetime income and legacy. Basically, you can kill two contractual birds with a contract that has an attached death benefit. It is important for many people to make sure that their beneficiaries or heirs receive some money when they pass. You can customize the contractual structure of SPIAs so that a death benefit is built into the policy, while you receive a lifetime income stream. It is like twice transferring risk. The risk of outliving your money, and the risk of being able to leave a guaranteed death benefit.
Both of these risks can be contractually transferred to the issuing annuity carrier.
There Is No Underwriting or Approval Process
If your breath can fog a mirror, an annuity is guaranteed to be issued. In order to get a life insurance policy, you have to go through medical exams and blood tests as well as an in depth review of your health history. That’s a no-go situation for a lot of people.
If you have experience with this situation, it's good to understand that Rated Immediate Annuities provide higher payouts due to poor health. It is worth researching the product if you are looking for guaranteed payments. The health review isn't as in depth as for life insurance, but you do need to prove your life expectancy is lessened by illness to qualify. The carriers meet you where you are at, and agree to be contractually obligated to pay you no matter how long you live, same as any SPIA with lifetime payments.
Example Structure: Life With 50% Death Benefit.
Meaning the payments are guaranteed for your life, regardless of how long you live. If you live to the ripe old age of 137 (you will look and smell like a prune!), the issuing annuity company is on the hook to pay. That’s the true benefit proposition of the lifetime guaranteed component of a Single Premium Immediate Annuity (SPIA).
The 50% Death Benefit guarantee means that regardless of what happens with the SPIA policy, one-half of the initial premium will go to the beneficiaries in a lump sum. So if you put $500,000 into a “Life with 50% Death Benefit” SPIA, then $250,000 is guaranteed to be paid out to your listed policy beneficiaries. That death benefit guarantee is contractual, regardless of how long you live and how much income you receive from the SPIA.
The Larger the Contractual Death Benefit, the Lower the Payment
The most popular ways to structure a death benefit with a SPIA contract is “Life with 25% Death Benefit”, “Life with 50% Death Benefit”, or “Life with 75% Death Benefit.”
Annuity companies have the big buildings for a reason. They don’t give anything away for free. That factual reality definitely applies to how you choose to structure the SPIA contract.
So is there a pension guarantee that has a contractual death benefit? The answer is yes. It’s called a “Life with Death Benefit” Single Premium Immediate Annuity.