The expression “life annuity” sounds like what so many people would like to have: a utility or economic benefit that extends for the rest of their lives. In its broadest outlines, the so-called financial product offers just that. But it also has a series of peculiarities to which it is advisable to pay close attention.
It is a insurance that has been booming for some years. At first, a person gives a company a significant amount of money: capital. Then, from a certain date, the company begins to give that person amounts of money, periodically and until the moment of his death.
How much money are we talking about? To get an idea: according to a report carried out by the study of International Financial Advisors, a 67-year-old man should contribute an initial capital of almost 55,500 euros to receive -for the rest of his life- about 345 euros each month.
For a woman of the same age, the initial premium should be much higher – just over 71,300 euros – to receive the same monthly payment. And it is that the life expectancy of women is greater than that of men. That is the main variable based on which these calculations are made, in addition to the initial capital and interest rates.
Such numbers indicate that, in order to “recover” all the money invested when contracting the product, a man should live to be 80 years old and a woman to be 84.
The insurance company assumes the risk of having to continue paying the monthly payment, as indicated, for the rest of the customer’s life, no matter how many more years there are. That is one of the advantages of a life annuity. There are more, which are detailed below.
Advantages of contracting a life annuity
The annuity earns interest. It is another of the reasons why it would be convenient to hire one and not, for example, to have a checking account (or even keep the money at home ) and use it little by little. However, it must be taken into account that the profitability of this product is generally very low: between 1% and 1.5% per year.
Perhaps the greatest advantage of contracting a life annuity lies in its tax benefits. It happens that, in many cases, the initial premium to hire her arises from the sale of a property, often a home that is not the usual one.
When a house or flat is sold, if there is a capital gain (that is, if it is sold for more money than was invested when buying it), you must pay personal income tax (IRPF). A tribute that can be equivalent to several thousand euros.
But, if within six months after the sale a life annuity is contracted, the transaction is exempt from the payment of personal income tax. Of course: this benefit only reaches people over 65 years of age and has an initial premium of up to 240,000 euros. If the sale exceeds that figure, it is necessary to pay IRPF for the surplus.
Another tax advantage of this product is that it is not taxed as income from work but as income from movable capital. This also favors the elderly, as the percentage of the tax decreases with age: it starts at 40% for those under forty years of age and gradually falls to 8% for those over seventy.
In addition, the life annuity allows a beneficiary to be designated in the event that the holder dies before “recovering” the capital invested. That beneficiary may not coincide with the forced heirs, so this product can also be a way to plan the inheritance.
Using all these reasons, life annuities are offered as a supplement for retirement. Especially when the most pessimistic forecasts for new pensioners are taken into account, which speaks of a reduction in purchasing power and difficulties in maintaining the standard of living in the future.
Risks and other negative aspects
Of course, you also have to take into account the risks and other negative aspects of this financial product. On the one hand, the already mentioned fact of its low profitability (1%-1.5%), which in many cases can even be below inflation.
There is a more attractive life annuity modality in this sense, known as “ceded capital”, which offers a higher return. But the risk is also greater: it is not possible to redeem the invested capital even in the event of the owner’s death.
When is it possible to redeem the initial premium? In the cases of life annuities most frequently contracted: calls for constant income or reserved capital. Although, in reality, recovering the total capital in this way is almost impossible, as the organization of bank users ADICAE warned in 2013.
Another of the negative aspects has also already been mentioned: the tax benefits are considered only in the case of people over 65 or 70 years of age, depending on the case.
The fact that they are not covered by the Deposit Guarantee Fund (FGD), which covers up to 100,000 euros of loss in the event of bankruptcy or insolvency of banking entities, is also often mentioned as a negative fact about life annuities.
Is it a life annuity then?
Gabriel Rodríguez points out that the life annuity may have a certain meaning in certain specific cases. For example, in the aforementioned assumption that a person over 65 years of age sells a non-regular home.
Or in that of someone who, when widowed, begins to receive a much lower pension than that received by their spouse. If he can sell a property or use savings to purchase an annuity to supplement that pension, this product may be useful.
But “those who have the opportunity will always be able to find rental alternatives in other places, with fewer penalties and higher interest,” says Rodríguez. He mentions exchange-traded funds (ETFs) or “portfolios made up of high-dividend stocks” as options.
These products require a much lower initial investment and generally offer both better rates of return and the ability to redeem capital more easily. However, it is clear that they also represent risks. And they require, of course, some minimal financial knowledge.
