Annuities & Life Insurance: From ‘live on’ to ‘leave on’

When it comes to insurance products, here’s one piece of advice: The key isn’t what the product is — it’s what the client wants to do with it.

We’ve been trained to think each product has one specific purpose. For example:

» An annuity is the “live on” product. It provides a secure retirement by way of income that can’t be outlived. 

» Life insurance is the “leave on” product. It provides for legacy and estate planning.

Let’s expand our thinking by considering three current and compelling factors.

1. We’re in the midst of the great intergenerational wealth transfer era. As much as $124 trillion is expected to pass from the baby boom generation to millennials and Generation X by 2048, according to Cerulli Associates.

2. Annuity sales are at record levels. LIMRA reported U.S. annuity sales totaled $434.1 billion in 2024.

3. It’s common for annuity owners to die with an annuity partially or fully intact, given the structure of many annuity contracts. 

When live on becomes leave on

At some point, your clients will pivot and decide that some or all their assets — particularly their annuities — are destined for someone else. That’s when live on becomes leave on. When that occurs, there’s a strategic lever within easy reach — annuity death benefit riders.

But first, how can you help a client determine the ultimate purpose of the assets they own? A few simple but probing questions will do the trick.

What is this asset? The answer can help you understand what the client knows about the asset.  

What is this for? This answer helps you determine whether the client understands the benefits of owning the asset.

Who is this for? This is probably the key question to help you figure out whether the asset benefits the client while living or someone else when the client dies.

Many consumers easily confuse product and purpose. Don’t assume the client knows the difference. Ask the questions.

Annuity death benefit riders

Let’s circle back to death benefit riders. For some, they may be a good option to enhance an annuity’s legacy value.

Although death benefit riders are not as common as income riders, both share similarities in design. These two riders:

» Are usually associated with a fixed indexed or variable annuity.

» Offer some kind of “rollup,” a predetermined rate of growth allowing a guaranteed accumulation of the death benefit value.

» Feature an accumulation period during which the rollup is active and the death benefit grows.

» Come with a fee based on the growing death benefit value and charged against the account value.

» May have a minimum eligibility age.

And much like its income rider counterpart, a “free” death benefit rider usually features an offset in product design to accommodate the feature. Because the benefit does add value to the underlying annuity, there must be a cost. That expense can be covered by an outright fee or it can come in the form of a modification to the policy. Modifications include a lower cap or participation rate, restricted liquidity, or some other benefit give-back.

As you explore the menu of death benefit riders, remember to ask whether the rider pays out in a lump sum or over five years. Both options have a place, but the value of a five-year payout may outpace that of a lump sum. Also, think about how long a rider will have to accumulate value. Some riders have a growth limit of 10 or 15 years. For clients with a longer life expectancy, the value of the benefit with this limitation will diminish the longer the client lives.

The ideal client

The ideal clients for a death benefit rider are 65-to-80-year-olds who intend to leave the asset to someone else. That is, they don’t need it for living expenses in retirement. Perhaps, due to health issues, these ideal clients don’t qualify for life insurance or they may want to avoid underwriting. They may also want to preserve their options to enjoy the benefits of the annuity while living. The death benefit rider then becomes a “just in case” outcome. 

Here are other prospects for an annuity with a death benefit rider.

The uninsurable

This is a client who may understand the value of life insurance but may not qualify for it. An annuity death benefit doesn’t have the same attributes as life insurance — namely a tax-free death benefit — but it’s a reasonable alternative. And although you don’t get the immediate leveraging of traditional life insurance, the value can build over time — especially with riders that don’t have a fixed expiration date on the accumulation period.

Life policy rescue

For a variety of reasons — faulty assumptions, underperformance or premium payment fatigue — an individual’s cash-value life insurance policy may lapse. But a policy can be rescued, thanks to a tax-free 1035 exchange. This allows you to exchange a life insurance policy for an annuity, allowing the death benefit value to recover over time with a death benefit rider.  

RMD reluctant 

If you have clients who worry about taking required minimum distributions, that may be a sign that they intend to leave an annuity as a legacy. An annuity death benefit rider can effectively allow for “having your cake and leaving it too.” Because most death benefit riders include a dollar-for-dollar offset, qualified account holders can satisfy the RMD requirement and still see the death benefit grow. 

Spousal continuation

Most annuities designate one person as the owner, the same person as the annuitant and the spouse as the beneficiary. When an owner dies, the proceeds are payable to the surviving spouse. Many surviving spouses, however, choose to continue the annuity under spousal continuation. 

Many death benefit riders provide up to three options for the spouse-beneficiary. 

1. Receive the death benefit value either in a lump sum or over time.

2. Elect spousal continuation and continue the death benefit rider.

3. Step up the annuity’s accumulation value to the death benefit. Here, the rider ends. 

Death benefit riders are a small but growing feature in the array of annuity options. By helping consumers identify the purpose of their assets, you can confidently guide clients and prospects toward the legacy outcome they envision. 

Paul Garofoli, FLMI, RICP, is a regional vice president of sales in individual annuities at The Standard.