What are life annuities?

Learn all about this product so you can plan and save for your retirement

In recent years, savings insurance policies have become increasingly popular in the Spanish pension sector as they offer an effective and secure solution for people who want to plan and save for retirement, and ultimately enjoy their savings when they eventually retire.

Life annuities are a product with great potential, as they offer policyholders the option to access savings generated over the course of their working life.

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However, what are life annuities?

Life annuities are life insurance products (usually with a single premium) that, after an initial contribution, generate income at specific intervals (usually on a monthly basis) over the purchaser's life.

Therefore, as private instruments, life annuities are a good option for people who are close to retirement and want to maintain their standard of living with the pension they are going to receive.

What advantages do life annuities offer the policyholder?

Ability to supplement income: They can be used to supplement income obtained from the public pension system, as the economic climate becomes increasingly more strained due to Spain's aging population.

Guarantee: They provide certainty due to the guarantee they offer in a context of high volatility and fluctuation on financial markets.

Security/certainty of the amount to be paid: They allow policyholders to maintain a specific income (which is known in advance) over the course of their lifetime. They can therefore adjust the product prior to retirement in order to maintain their standard of living later on.

Taxation benefits: Depending on the age of the customer when they engage the product, a number of reductions may be applied to the income included as taxable income in income tax calculations. This will make effective tax rates lower, which makes the product particularly attractive. Based on the specific characteristics of each insured, (basically their personal and family situation), there are a number of ways life annuity policies can be engaged: if the individual is married, single or widowed, does or does not have children, etc.

Therefore, life annuity insurance policies are subject to a number of variables:

  • Additional question: how much of the investment do you want to leave to your beneficiaries?
  • Income for another person: Do you wish to be the only recipient of the annuity or, after your death, do you want it to be paid to another person until their death?
  • Equity of redemption: The portion of the contribution specified in the Particular Conditions of the policy as a premium with equity of redemption can be redeemed at market value.
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Policies can also be adapted to suit insureds who do not wish the interest rate charged on their life annuity to remain fixed for the duration of the agreement, but who prefer instead to update the interest rate on an annual basis in accordance with the performance of market interest rates. It is also possible to increase annuities on a yearly basis according to a specific percentage (%) established in the contract.

When life annuity policies are issued with right of redemption, the policyholder can exercise this right in accordance with the contractual terms and conditions. Said redemption is always performed at market value. Therefore, based on market conditions, the redemption value may be less than the original contribution. However, as provided for by the regulation, if the policyholder terminates their life annuity policy by exercising their equity of redemption right, they must repay any income tax relief they have received in the same year in which the redemption is performed.

Therefore, it can be concluded that life annuity products:

1. Can be adapted to a great extent to the financial circumstances of each policyholder.

2. Offer significant advantages in terms of financial returns and tax benefits.

3. Give policyholders peace of mind by enabling them to maintain a certain level of income irrespective of how long they live.

4. Are an ideal way to supplement income received from a public pension provided by the social security department.

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