Annuities are often recommended as a solution for the risk of outliving your money. But if you die young, you might not realize that full value. So should clients consider their life expectancy before considering an annuity?
"A person in poor health and with a limited life expectancy may not see much of a need for protected lifetime income in retirement," says Adam Lalla, vice president of competitive market solutions at Radnor, Pa.-based Lincoln Financial Distributors. "However, many clients are unaware what their actual life expectancy could be."
That doesn't mean it shouldn't be on their advisors' minds. "Professional, licensed insurance agents definitely should consider health and longevity expectations in their recommendations to clients," says Michael Zmistowski of Financial Planning Advisors in Tampa, Fla.
But don't worry, Zmistowski notes. Dying young does not necessarily mean forfeiting an annuity's value or its guaranteed income stream. "It depends on the contractual conditions," he explains.
It is theoretically possible to lose the entire asset upon death. "You could buy an annuity that works that way," says Scott Stolz, a president at Raymond James Insurance Group in St. Petersburg, Fla. "[But] almost no one choses such an option."
Most clients are "willing to take a little less income to get a guarantee that the income will last over two lives," he says, referring to the owner and spouse.
Lalla at Lincoln concurs. "The vast majority of annuities that are purchased for income have death benefit options for spouses and non-spouses," he says. "In fact, some death benefits guarantee a return of premium, regardless of investment performance."
It all depends on which type of annuity is chosen. "If a 'life only' payout option is selected, payments will stop when the client dies," says Jill Perlin, vice president of advanced planning and sales training in Prudential’s Individual Solutions Group in Newark, N.J. "If a 'joint and survivor' option is selected, however, payments would continue to the remaining annuitant—typically a spouse or partner."
Lincoln's Lalla says that whether a client has dependents can make a difference, too. "Consumers without dependents might prefer an annuity with the highest level of income but a less advantageous death benefit, such as a single premium immediate annuity (SPIA)," he says.
While inheritance may figure into the annuity decision, it's not typically the primary consideration. Prudential’s Perlin notes that clients who are concerned specifically with leaving a legacy often focus on life insurance, though an annuity can be an appropriate tool if, say, the client cannot get life insurance because of a pre-existing health condition.