Annuity Legacy Strategies

Will your beneficiaries be celebrating a lump sum, or will you establish annuity payments as a death benefit?
Will your beneficiaries be celebrating a lump sum, or will you establish annuity payments as a death benefit?. photo by: Selimaksan /E+ / Getty Images

As a very good friend of mine who sells life insurance says, “One out of one of us is going to die.”  A motivational speaker he is not, but his statement is brutally factual and a reminder of our pending mortality. If you have some wealth to leave as a legacy, you think about what will happen to that wealth when you contemplate your own mortality. A lot of my clients tell me that they could care less if their heirs get a penny, and they are going to spend every last hard earned dollar on themselves.

I understand that sentiment, and sometimes my two teenage daughters push me to contemplate the same type of future retirement goal. However, more and more people want to leave money to their heirs and beneficiaries, and want to structure that legacy to distribute the money on their own terms. Some call this the ultimate method of controlling from the grave, and some think of it as saving their heirs from blowing the money in a frivolous manner.

A good estate planning lawyer can structure specific trusts to carry out your wishes to the most specific detail, but annuities can also provide similar “contractual handcuffs” that will leave the legacy that you have worked so hard to be able to generously give.

Attached Death Benefit Riders Are Legacy Options

Even though annuities are actually classified as life insurance policies, the death benefit amount does not pass tax free to the heirs like straight up life insurance does.

Pure life insurance is still the best legacy product on the planet, but if you can’t qualify for life insurance, then an annuity death benefit rider might be a very good alternative solution.

Some deferred annuities like variable, indexed, or fixed offer the ability to add a death benefit income rider to the policy at the time of application.

A death benefit income rider is an attached contractual guarantee to a policy. It has an annual growth percentage for a specific period or time or until death (depending on the policy). The amount accumulated by this growth percentage can only be used as part of a death benefit. This is a completely separate calculation within the annuity policy, and can’t be transferred or accessed in a lump sum while you are alive.

Leave Your Beneficiaries a Lump Sum or an Income Stream Legacy

Many of my clients are adamant about not leaving their heirs and beneficiaries a large lump sum dollar amount. They may feel the heirs can't handle the sum responsibly, or their need to control the situation is the issue. Whatever the reasons, distributing the legacy over time is definitely growing in popularity as a contractual way to control things from the grave. Control freaks rejoice! 

I always joke that your heirs are going to show up to your funeral in a Ferrari or Lamborghini regardless of your wishes. The only thing that you can do is make sure that they are making payments on it, and not buying the exotic car with a lump sum.

Leave Your Beneficiaries a Lifetime of Payments

Single Premium Immediate Annuities (SPIAs) and Longevity Annuities (aka: Deferred Income Annuities – DIAs) are the most efficient income products used for legacy streaming to your heirs.

Instead of leaving a lump sum, you can set up a joint life payout with your beneficiaries so they can receive a lifetime income. It’s a pretty powerful legacy statement to have a monthly or annual (depending how you set it up) income steam for the life of the beneficiary. I advise most who choose this legacy streaming strategy to contractually attach a COLA (Cost of Living Adjustment) Rider increase to the income annually. You can choose an annual percentage increase to the income stream at the time of application. I usually advise a 3% COLA, which means the income stream will increase every year by 3% for the life of the beneficiary.

Other Legacy Strategies

I pride myself on solely using the contractual guarantees of annuity policies to make my recommendations. This unique discipline sets me apart from most agents, and I have developed unique strategies based upon these contractual guarantees.

Strategies like the  Legacy Income Monster(LIM) and the Leveraged Legacy Doubler (LLD) are used to solve for specific legacy planning goals.

When planning your legacy,think about how you want to leave money to your heirs. With that question answered, maybe a customized annuity strategy could be the solution that best fits your specific goals.