When you are looking for a policy that will leave money to your heirs, life insurance is typically the best way to do that. But there are some people who cannot qualify for life insurance policies because of the underwriting requirements. Others have their own reasons for not wanting to purchase a life insurance plan. If you are one of those people, you can use annuities to leave money to your heirs. There are two ways to do this: through death benefits or an inherited income stream. In Stan Haithcock’s Marketwatch article, he says that “Some annuities are to die for.” Annuities guarantee death benefits in the same way as life insurance, but they offer other benefits as well. They will cost more than traditional life insurance policies that would only offer a guaranteed death benefit. Although annuities are a life insurance product, they do not have the same tax-free benefits as traditional life insurance policies. A lump sum death benefit from an annuity will be taxed, unlike the tax free transfer that comes with a life insurance policy.
You can add a death benefit rider to many different annuity policies. These riders typically charge an annual fee that will continue for the life of your annuity contract. With death benefits, there is usually a guaranteed annual growth rate that lasts to either a specific age or time period. These are most often to age 85 or 10 years in length. Newer indexed annuities are offering lower annual guaranteed percentages, but tying the growth to an index so that you have the potential for even more than the guaranteed growth. Pay close attention to whether your annuity death benefit offers simple interest or compound interest because that can make a big difference in your actual return. Death benefits within an annuity product cost money, so make sure that you know the value that this death benefit will bring to you and your heirs and plan your finances accordingly.
Instead of offering your beneficiaries a lump sum death benefit, you can also have them receive a guaranteed income stream for a certain period of time. This can be helpful if you worry that your heirs will spend your legacy too fast and for other reasons as well. Single-premium immediate annuities (SPIAs) not only pay income to your heirs, but also pay you guaranteed lifetime income. A SPIA purchased as a “Life with 30-year certain” will continue to pay monthly income to the annuity owner until they die. If they die at any time before the 30 years is up, their beneficiaries will receive the remaining payments to last the entire 30 years. The simplicity and no fee structure of SPIAs and deferred income annuities make them a great way to guarantee some type of death benefits to one’s heirs.