What Is a Substandard Health Annuity?

A substandard health annuity is an insurance product that can be purchased by a person with a serious health problem which will likely shorten the person's life expectancy. This annuity is a type of straight life annuity, also known as an enhanced or rated annuity.

Key Takeaways

  • A substandard health annuity is an annuity purchased by those who expect a shorter life expectancy than they initially thought.
  • There are many complications regarding this type of annuity since it is easy for insurers to issue annuities based on risk factors and mortality pools rather than an individual's medical situation.
  • Substandard health annuities require a medical examination before issuance.

Understanding the Substandard Health Annuity

These annuities pay out more money per period than other straight life annuities because the length of the annuitant's life is expected to be significantly shorter than that of a healthy person of a similar age. 

Whether these products are a good choice, even for those in poor health, is an open question. "Those in very poor health may find it inadvisable to buy an annuity, unless it is a substandard health annuity at a very discounted price," according to the American Academy of Actuaries.

Substandard annuities are medically underwritten, which means the applicant must submit to a medical exam.

"There are few circumstances when it might be advisable for anyone to use their entire retirement nest egg to buy an annuity because most income annuities do not allow withdrawals for emergencies. Some people delay the purchase of an annuity to a more advanced age, with the intent of waiting until the value of the mortality risk pooling makes the annuity more attractive than average alternative investments on an annual basis." 

More About Annuities

An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income stream for retirees. Annuities are created and sold by insurance companies and financial institutions which accept and invest funds from individuals and then issue a stream of payments at a later point in time. The period of time when an annuity is being funded and before payouts begin is referred to as the accumulation phase. Once payments commence, the contract is in the annuitization phase.

Most annuities are sold without any consideration of the individual health status of the applicant, but substandard annuities are the opposite. For these and all annuities, it's wise to conduct a careful review of the financial strength of the insurer. Annuities are not guaranteed by the government and are only as good as the financial strength of the company that issues them.

Annuities typically come with fees and commissions as well as surrender penalties if you want to sell them before their term is up. As is the case with any retirement product, speak with a retirement planner before making an investment decision—especially one that is as laden with emotions as a substandard annuity can be.