Use A Reversionary Annuity To Provide For Your Surviving Spouse

If your income doesn't make adequate provision for your spouse if she survives you

, you might consider a reversionary annuity to make a better income provision for her. This article explains when and how a reversionary annuity can be effective.

Under retirement, circumstances may arise where a wife is in jeopardy of losing an income she can live on when her husband dies. This can arise if the husband had opted for a 'single life' payout for his pension or annuity before going into a 'late marriage'. Or, it might be that a 50% reduction of his pension payout for his wife isn't going to be adequate for her to live on.

So, how can one spouse assure an adequate income for his surviving spouse under such circumstances?

You might consider 'just going out and buy life insurance on the husband's life so the wife can live off its death benefit'. But buying permanent life insurance may be too expensive for a retiree. And, besides, it's not clear whether your wife would be able to manage a death benefit for supplying her income after you do die.

*What a reversionary annuity offers:

A reversionary annuity would supply an immediate annuity payout for the life of the wife at the death of the husband. The funding for this 'immediate annuity' comes from the life insurance death benefit built into the husband's reversionary annuity premium payments.

You can see that the reversionary annuity is similar to a combination of term life insurance policy, a permanent life insurance policy, and an immediate annuity. The benefits of the reversionary annuity is that the premiums the husband pays for the reversionary annuity may be less than those of a permanent life insurance policy and possibly competitive with a those of a term life policy. Yet, the policy doesn't stop at a given date like a term life policy would.

Most reversionary annuities require that a beneficiary once assigned can't be changed. That's because insurance companies can play the life expectancy statistics game for both the husband and his designated beneficiary wife for such contracts to produce attractive policy premiums compared to the original permanent life insurance option.

*How the reversionary annuity payout it taxed:

When the annuity payout begins for the beneficiary, she'll be taxed on only a portion of each payout in a fashion similar to most annuity payouts. The untaxed portion of each payment arises from the tax-free return of the reversionary annuity's value at the time of the husband's death. This is pro-rated by dividing that value by the remaining life expectancy of the beneficiary in months - for a monthly payment scheme.

A nice tax benefit of receiving an annuity income is that annuity income is not included when working out what triggers taxation of your Social Security benefits. So if your income is somewhat high, choosing an annuity income option for your savings can reduce the possibility of your Social Security benefits being taxed.

Although a reversionary annuity may offer an affordable way to provide a guaranteed income to protect your surviving spouse's standard of living, not all policies are the same. As an example, some contracts have a return of premium benefit in case the insured outlives the beneficiary; some have inflation protection for payouts, and some don't require the beneficiary to bypass a medical exam.

Be careful about premiums increasing over time. And always read the fine print.

by: Shane Flait

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