What are Reversionary Annuities

Reversionary annuities are a retirement income strategy that combines an insurance policy with an immediate annuity to provide for a surviving spouse. Similar to a permanent life insurance policy, the policy owner of a reversionary annuity pays a premium to guarantee a benefit to the survivor. With a reversionary annuity, upon the insured's death, the beneficiary receives a guaranteed lifetime income instead of a lump sum payment.

BREAKING DOWN Reversionary Annuities

Because the income payments will cease upon the death of the beneficiary, and if the beneficiary dies before the insured, the policy is terminated, premiums are more consistent with those of term insurance policies than permanent policies. This makes the reversionary annuity more affordable for older individuals.

Limited Audience

Annuities are not for everybody and reversionary annuities are for fewer people still. Since the age and gender of the beneficiary can impact the premium, this allows people with serious medical conditions to become insured at a rate they can afford. With this type of annuity, the older the beneficiary, the lower the premium. 

By paying the benefit out over many years, the insurers that offer these policies aren't exposed to large lump-sum payouts. The policies typically lack a cash surrender option, which also helps to keep the cost low. 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.

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. 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.

Keep in mind that annuities are complex investments subject to fees and commissions and little or no access to the money you paid in, so be prepared to do substantial research before investing.