Annuity redemption and death: what you need to know

Life annuity is a financial product that ensures the collection of a periodic amount throughout the life of a person until death. It is an insurance that makes a redemption of the contributed capital and converts it into annuities. We will see the relationship between the annuity surrender and death.

Conten Table

renta vitalicia

Life annuity is a financial product that ensures the collection of a periodic amount throughout the life of a person until death. It is an insurance that makes a redemption of the contributed capital and converts it into annuities. We will see the relationship between the surrender of the annuity and death.

The contribution can be made with a single initial cash premium, or periodically. The insurer pays the contributor a certain amount on a regular basis until death. But what happens when the contributor dies? In this post, we will tell you everything you need to know about the life annuity, and what happens with the surrender of the capital when there is a death.

 

What is annuity?

As mentioned above, the life annuity is a financial product that belongs to the insurance sector. It works as a savings policy for all those who seek to supplement their public pension, since it allows planning savings to be received later in an increased form as income. The life annuity policyholder receives it from an age that is agreed with the insurer, and generally on a monthly basis.

 

What happens to the redemption of capital when there is a death?

The life annuity is intended to cover the drop in income that occurs after retirement, a time when expenses change, health and leisure expenses increase, and cash income is often reduced. At the same time, it also provides the possibility of inheritance planning.

The life annuity insurance can be contracted in two ways: by two policyholders or by a single policyholder. In the first case, if one of the policyholders dies, the other will receive the annuity amount until the time of his own death. If the policyholder is the sole holder, he/she designates beneficiaries in the annuity contract, who will inherit the annuity at the time of the policyholder’s death. If the beneficiaries have not been formally established, a designation in order of priority is established in favor of the spouse not legally separated, children, and parents.

In the absence of all the above, the legal beneficiaries are the legal or testamentary heirs. The policyholder may also establish the form in which the beneficiaries receive the capital, either as a single payment or in the form of a periodic annuity, in the same way as the policyholder received it.

 

It is worth mentioning that the life annuity is different from the perpetual annuity. Perpetual annuity is collected beyond the death of the beneficiary, and is carried forward for generations. In contrast, the life annuity is exhausted upon the death of the beneficiary. Although it is not part of the estate, there are special clauses that integrate the annuity into the estate that is passed on to the heirs.

 

Types of annuities

There are two different types of annuities, which depend on when the annuity starts to be collected, i.e., whether the collection is immediate or deferred.

  • Immediate income

The immediacy of this annuity lies in the fact that it will begin to be received the month after the capital corresponding to the premium has been contributed. This type of annuity is beneficial for people over 60 years of age, who contribute around 45,000 euros. The older the person is, the more profitable it will be, since the annuity was created precisely for retired or soon to be retired people.

  • Deferred annuity

In the deferred annuity, the beneficiary begins to receive the annuity at a future date established in the contract. In other words, he/she will be able to receive much more money for his/her contributions in the future.

The 3 types of annuities

There are different types of annuity surrender, depending on the possibilities of capital surrender. A distinction is made between: surrendered capital, retained capital and mixed mode.

 

  • Modality of assigned capital

This mode excludes any possibility of recovering the initial premium invested, making it the highest risk mode: it is not possible to redeem the invested capital, even in the event of the holder’s death. Premiums in this mode are the highest.

 

  • Retained capital mode

In this type of plan, also known as constant annuity plan, the contract can be cancelled and the capital can be surrendered at any time. In the event of the policyholder’s death, the beneficiaries receive the premium contributed by the policyholder. What must be taken into account is that if the policyholder decides to redeem the capital before death, he/she will receive an income lower than the market value.

 

  • Mixed mode

In the case of the mixed mode, the capital can be redeemed at market value at any time, as in the case of the retained capital mode, but if the owner dies, the beneficiaries will receive a percentage of the contribution, which will decrease over time. This mode is the most common when the initial contribution is high. Otherwise, it is the least recommended.

Now that we have seen the types of annuities and the different modalities, we will tell you why annuities are convenient.

 

Why is an annuity suitable?

Among the advantages of annuities, we can mention one that is fundamental and that is security. We all know that it can be distressing to think about whether our savings will run out when we are older. A life annuity guarantees us that until our death we will have a premium that will allow us to have peace of mind.

Life annuities are also taxed in a way that is beneficial, since they are taxed less than earned income. This is so because the capital redemption of the annuity is taxed as savings income and income from movable capital in the IRPF, which implies the payment of a lower amount of taxes. In addition, only a percentage of the income received is paid.

Finally, as we mentioned at the beginning, the main objective of the annuity is to allow policyholders to cover the drop in their income when they retire, to cover their health or travel expenses, as well as to provide them with the possibility of planning their inheritance.

If you have any doubts or need advice, do not hesitate to contact us. We solve and manage all types of tax, labor, commercial and legal procedures as self-employed, small or medium-sized companies. At Blegal we are the only law firm that meets all your needs with commitment, dedication and energy.

 

Foto de Johnny Cohen en Unsplash

The death of the holder of a life annuity generally terminates the right to receive the annuity, unless otherwise agreed in the contract.

According to Law 50/1980, on Insurance Contracts, life insurance, which includes many life annuities, is contingent on the life of the insured.

If the contract is a simple life annuity, the capital is considered “consumed” after the death. However, if there is a reversion clause or a guaranteed period, the annuity will continue to be paid to the beneficiary or heir until the end of the agreed term.

Case law, such as the Supreme Court ruling of October 10, 1995, establishes that the insurer stops paying after the death unless additional clauses specify otherwise.

In a life annuity without reversion clauses or guaranteed periods, there is no “fund” that can be integrated into the inheritance, as the capital is considered extinguished upon the death of the holder, since the insurer has been assuming the survival risk.

If there is a guaranteed period, the annuities will continue to be paid until the end of the term.

In the case of reversion, the annuity is paid to the designated beneficiary.

Under inheritance law, the beneficiary acquires their right in a personal, not hereditary, manner, according to Article 88 of the LCS and established case law (Supreme Court ruling of February 6, 1998).

The redemption of a life annuity is conditioned by what the contract and the law stipulate. Not all policies allow the capital to be redeemed. If redemption is possible, Law 35/2006, on the Personal Income Tax (IRPF), and its Regulation (Royal Decree 439/2007) govern the tax treatment:

As a general rule, the taxation of life annuities under the Personal Income Tax (IRPF) is based on the age of the insured at the time of contract signing:

  • Under 40 years: Taxed at 40% of the annuity received.
  • Between 40 and 49 years: Taxed at 35%.
  • Between 50 and 59 years: Taxed at 28%.
  • Between 60 and 65 years: Taxed at 24%.
  • Between 66 and 69 years: Taxed at 20%.
  • 70 years or older: Taxed at 8%.

These percentages are applied to the annuity received.

  1. Life insurance with redemption rights: The capital obtained minus the contribution is considered movable income, taxed between 19% and 28% in the savings base.
  2. Life annuities with exemption for reinvestment for those over 65: If a gain is reinvested in a life annuity, it may be exempt from IRPF, but if redeemed early or conditions are violated, the exemption is lost.

Contractual penalties: Early redemption is usually penalised by insurers, reducing the value of the redemption.

The life annuity is terminated upon the holder’s death, unless there is a reversion agreement or guaranteed period, in which case the annuity continues for the beneficiary. The heirs cannot claim the capital if these conditions are not met. This principle reflects the risk assumed by the insurer, which retains the capital if the holder dies earlier than expected.

  1. Annuities without death coverage or guaranteed period: They are not taxed, as the contract is terminated upon the holder’s death.
  2. Annuities with a designated beneficiary: If the beneficiary receives benefits, they are taxed under the Inheritance and Donations Tax (ISD), considering the right as their own, not inherited, with tax rates and exemptions depending on the Autonomous Community and the degree of kinship.
  3. Annuities with death coverage, but no beneficiary: The capital is integrated into the inheritance and is received by the legal heirs, who are taxed under the ISD, unlike annuities with a beneficiary.

Case law establishes (e.g., Supreme Court ruling of February 6, 1998) that sums received by beneficiaries of life insurance are a personal right, not inherited, derived from the policy and the law (LCS).

The redemption of a life annuity depends on the contract. Although traditionally not redeemable, some entities offer partial or total redemptions with financial penalties, tax effects, and time limitations. It is crucial to review the policy conditions and consult the insurer about the amount and its tax implications.

The taxation of life annuities is regulated by Law 35/2006 (IRPF) and Royal Decree 439/2007.

  • Annuities not from reinvestment: They are considered income from movable capital, with an integration percentage depending on the age of the holder when the annuity is established.
  • Annuities from reinvestment (over 65 years old): The gain obtained from selling an asset may be exempt if reinvested in a life annuity, provided the requirements are met.

Death of the holder: If the annuity passes to a beneficiary, it is taxed as income from movable capital according to their age. If there is death coverage, the additional capital is taxed under the Inheritance and Donations Tax (ISD).

Related Articles

See all

Utilizamos cookies propias para mejorar nuestros servicios y mostrarle publicidad relacionada con sus preferencias mediante el análisis de sus hábitos de navegación. Si continúa navegando, consideramos que acepta su uso.

Aceptar y cerrar
Rechazar