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Taking Life and Annuity into Consideration

We took the biggest factor into hand. Life expectancy.


The challenge

A married couple were at the point of retirement. They both worked for the same organization for over 30 years and each had built up a nice pension. The big question was whether they should each sign-up for the monthly annuity or take a lump-sum distribution and roll it into an IRA account. The annuity would provide for guaranteed monthly income, but after the owner passed away, there would be no future payments to their children. On the other hand, the lump sum would provide them with cash they could ultimately leave for their children but they would need to withdraw from the account each month to live on it. If they didn’t manage it well, they would run out of money. This was the dilemma – take the guaranteed monthly annuity but not have any assets to leave the kids or take the money and hope it doesn’t get spent down.

To complicate matters, if they chose the annuity, they would have to decide if they wanted a larger payment to the owner and a smaller payment to the survivor or a smaller monthly payment that would not go down in value if the owner passed away.

When you have a situation where there is no “right” answer because it relies on things that are both unknown and uncontrollable, what do you do?


What we did

The biggest factor is life expectancy. If we knew how long both the husband and wife would live, this would be a much easier decision. Since the annuity payments only last as long as the owner and the spouse are alive, if they took the annuity and passed away the following month, they would only receive one payment each. The rest of the money would be lost forever. However, if they had taken the lump sum IRA, those assets could be passed down to their kids. If we knew the wife would live to 95 but the husband would live to 80, it would make more sense for the wife to take the largest monthly annuity payment for herself (and none for her husband if she passed away first) and have the husband take the option that provided the greatest monthly payment to his survivor spouse.

Of course we didn’t have this information. What we knew is the wife was in excellent health and a few years younger than the husband who had some health issues. Most advisors would have chosen the largest monthly benefit to the wife, but we weren’t so sure. As a financial planner I know that the unexpected can happen and you need to plan for it. I suggested she take the largest monthly payout assuming she would live a long life and that he would pass away first . . . BUT I couldn’t be sure this was going to happen. So I suggested we hedge our decision by purchasing a low-cost 15 year term policy on her life. The 15 year policy was suggested because the breakeven on the annuity was 15 years. In other words, if she passed away before 15 years it would be financially advantageous to have taken the lump-sum, but after 15 years the annuity would be the better option. By purchasing the low-cost term insurance we avoided the possibility she would get the monthly annuity but then pass away shortly after.



The outcome

  • The outcome was tragic.
  • For several years they had a thriving retirement. They lived off the monthly annuity payments, traveled, and helped their children. And then one day I received the call. The wife was diagnosed with inoperable lung cancer. Shortly thereafter, she passed away. She was retired for about eight years.
  • Financially, she only received a fraction of what we thought she’d receive from the annuity, but the life insurance paid out $1 million. Prior to her passing, she expressed a desire to help the kids, so we changed the beneficiaries to allow for each child to receive $100,000 and for the husband to receive the remaining $700,000.
  • The kids have been able to pay off student loan debt and save for their children’s education as well as their own retirement while we are investing the $700,000 for the husband and pulling money from this account each month to support his lifestyle.
  • Without the insurance, he would have been forced to sell illiquid real estate to pay his living expenses.


These examples are for illustrative purposes only. Any strategies referenced herein do not take into account the investment objectives, financial situation, or particular needs of any individual. They should not be considered individual advice, suitability must be independently determined. Individual results will vary and may be more or less favorable than in the examples shown.

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