According to a 2005 AARP Report, there is a 40% chance that an individual over 60 will experience poverty at some point. In addition, life expectancies continue to rise; someone who was 65 years old in 1950 had a life expectancy of an additional 13.9 years. By 2004, the expected life span for a 65-year old had shot up to 18.7 years, based on statistics by the U.S. Department of Health and Human services. Because these are just averages, in practical terms, a surviving spouse could live for many years - even decades - after his or her partner dies.
As a result, retirees and those close to retirement are becoming more concerned than ever about providing for their survivors. A survey conducted by LIMRA in 2001 found that 60% of retirees and 68% of pre-retirees were worried about providing for a surviving spouse.

So what can you do to make sure your loved ones have the means to get by without you? Read on as we cover some of the options available for setting up survivor benefits.

The Conventional Approach
When it comes to providing benefits for survivors, life insurance is a common solution. However, permanent life insurance can be expensive, especially for older individuals. Plus, it might not provide enough lifetime income for survivors.

Another thing to consider is whether your beneficiaries are capable of managing a large, lump sum death benefit that is supposed to last a lifetime. (For more on this topic, read Buying Life Insurance: Term Versus Permanent.)

A Practical Alternative
A reversionary annuity could be another solution. A reversionary annuity is somewhat like a three-way combination of a term life insurance policy, a permanent life insurance policy and an immediate annuity. It offers:

  • Premiums competitive with those of term life insurance, but the coverage doesn't stop at some predetermined date like it does on term insurance.
  • A guaranteed benefit to survivors, similar to permanent life insurance. The premiums can be lower than permanent life insurance, but instead of a lump sum benefit, it pays the beneficiaries a guaranteed, lifetime income. However, most policies dictate that once a beneficiary has been selected, it cannot be changed. Furthermore, unless specified otherwise, the policy often is terminated if the beneficiary dies before the insured individual.
  • Funding for the annuity from the life insurance death benefit. This means each premium dollar is highly leveraged to maximize the amount for your beneficiaries.

When a Reversionary Annuity Works
A reversionary annuity can be worthwhile if there would be a drop in income, such as from a pension or Social Security, when a spouse or partner dies.

Example - When a Reversionary Annuity Pays
Here\'s a hypothetical example of a 65-year old couple, Harold and Clara, who could benefit from a reversionary annuity. When Harold retired five years ago, he was single. Therefore, he selected a life-only option from his employer\'s pension plan so he could receive the highest payout - $3,000 a month. Recently, Harold married Clara. Now the problem is that when he dies, Clara gets nothing because the pension income stops.
Harold is worried that if he dies first, Social Security alone will not provide Clara with enough steady income to pay the mortgage, taxes and other ongoing expenses. To make up for his lost pension income, Harold could buy enough life insurance to give Clara $3,000 in monthly income.
Harold\'s life insurance agent determines that Harold will need a $490,000 policy. If Harold predeceased Clara, she could put that money into an immediate annuity to generate a guaranteed $3,000 monthly income for the rest of her life. The premium, however, is more than Harold can afford.
However, a reversionary annuity could accomplish the same thing for a lower premium. The monthly premium would guarantee Clara $3,000 in lifetime income should Harold die first. After she dies, the insurance company\'s payments stop.
In this case, a reversionary annuity would allow Harold to take comfort in knowing that for pennies on the dollar, Clara will able to maintain her standard of living should he die first.

Taxability of Income
A reversionary annuity's beneficiary will not owe income tax at the time of the insured's death. Once payments to the beneficiary begin, the tax will be pro-rated based on how long the payments are expected to last. This means that part of the income will be taxable and part will be a tax-free return of the annuity's value at the time of the insured's death.

What's more, annuity income is not included when calculating the taxability of Social Security benefits.

This could result in a higher net income for your beneficiaries than they would get from other investments. Consequently, they might be able to preserve the tax-deferral of their IRAs longer and not begin taking taxable distributions until required by law.

Conclusion
The reversionary annuity offers a simple and affordable way to provide a guaranteed income to protect your beneficiaries' standard of living, but not all reversionary annuities are alike. Some offer inflation protection. Some have a return of premium benefit in case the insured outlives the beneficiary. And others allow the beneficiary to bypass medical exams.

Be sure to read the fine print. Even though the amount of income for your beneficiary is guaranteed, your premiums are not and can go up each year. In addition, look for a reversionary annuity issued by a top-rated carrier.

Related Articles
  1. Estate Planning

    Before You Agree to Be an Executor: Know This

    How to avoid 5 surprising hazards of being the executor of an estate.
  2. Retirement

    Retirees: How to Survive When Interest Rates Drop

    Low interest rates are a portfolio killer if you're living off of investment income. Some strategies for dealing.
  3. Personal Finance

    The Top 6 Books for Estate Planning

    Here are six outstanding books that can help you with your estate planning.
  4. Estate Planning

    Estate Planning: 16 Things To Do Before You Die

    If you don’t plan your estate, your surviving family may have to deal with disputes and probate that were avoidable.
  5. Investing Basics

    The Top 4 Income Investments for Retirees in 2016

    These four investment types should mitigate risk in 2016 for retirees seeking income.
  6. Your Practice

    Advisors: $240B in Fees Up for Grabs by 2030

    Advisors have an opportunity to win generational assets over the next 15 years. Here are some tips on how to cater to different demographics.
  7. Personal Finance

    Want Your Will to Prevail? Don't Die Intestate

    If you die without making a last will and testament, you are said to have died intestate. What happens to your assets in this case?
  8. Fundamental Analysis

    3 Variable Annuities to Consider

    Discover three variable annuities to consider in your retirement portfolio. Read summaries of each annuity and the benefits they offer.
  9. Your Clients

    When to Trust a Revocable Trust

    Unsure of how your assets will be dispersed once you're gone? Here's how setting up a revocable trust while you're here can be a big benefit.
  10. Products and Investments

    How to Hedge Longevity Risk with Annuities

    Many Americans are looking for guaranteed retirement income that will last as long as they will. Here's how immediate annuities do just that.
RELATED FAQS
  1. Where else can I save for retirement after I max out my Roth IRA?

    With uncertainty about the sustainability of Social Security benefits for future retirees, a lot of responsibility for saving ... Read Full Answer >>
  2. Are estate planning fees tax deductible?

    Estate planning fees may be tax deductible, but only if certain conditions have been met. Internal Revenue Service (IRS) ... Read Full Answer >>
  3. Can personal loans be included in bankruptcy?

    Personal loans from friends, family and employers fall under common categories of debt that can be discharged in the case ... Read Full Answer >>
  4. How liquid are variable annuities?

    Variable deferred annuities and variable immediate annuities are not considered liquid. Variable deferred annuities carry ... Read Full Answer >>
  5. Do variable annuities have RMDs?

    Variable annuities are not subject to required minimum distributions (RMDs) unless they are held in qualified plans, such ... Read Full Answer >>
  6. How much money does Texas make from unclaimed property each year?

    In 2014, the office of the Texas Comptroller of Public Accounts reported $234 million in unclaimed property claimant liabilities, ... Read Full Answer >>
Hot Definitions
  1. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  2. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  3. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  4. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  5. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
Trading Center