Life Annuity: Everything You Should Know Before Contracting It

An insurance product preferred by many people is annuity insurance. It becomes an option to secure the public pension without the risk of using all of it and ending up unable to afford basic needs due to old age. Below is a breakdown of this product and the special features it has to help you decide whether it is perfect for you. It can be perfect for some assignments, though, but in other cases, it is rather subpar. Part of this information is provided by the Tax Agency and also Finect.

What Are Annuities?

Life annuities are life-savings insurance that provides terms in the form of a monthly, quarterly, or annual guaranteed payment in exchange for a lump-sum payment until the policyholder’s death. This income arises when the savings are transmuted into a regular receivable, which could, at some point, be in the form of wages. As a rule, such savings are made one-time (single), although there are savings for extraordinary premiums – multiple payments.

Factors Determining Annuity Income

The income amount you will collect depends on several factors, including:

  • Amount Contributed: The amount contributed to the organization, whereby a higher amount contributed will imply a higher earned income.
  • Age: Age at the time of contracting a particular deal or at the time when such observation was made.
  • Sex
  • Life Expectancy
  • Type of Insurance Contracted

Types of Annuities

Indeed, it will help to understand that not all annuities are created equal. There are two main types of annuities:

Immediate Annuities

For this type, you are paid as soon as the contract starts, that is, the following month. This is the reason why most individuals over 60 years of age invest in reverse mortgages, given the tax relief associated with this age group.

Deferred Annuities

The payment is not received until a specified time in the future as agreed upon in the contract. For example, it can guarantee payments beginning from the moment of signing the contract at the age of 40 or 50 and receiving the payments at the age of 60. It guides the formulation of contributions during the waiting period for the purpose of aiming to develop a certain amount for future income.

Types of Annuity Insurance

There are several types of annuities, and it’s important to understand them when choosing the one that best suits your needs:

Transferred Capital

In this type, the insurance company uses the emerging capital through contribution in order to secure your life annuity. The contributed capital cannot be redeemed, but this provides the highest income among all of the capital.

Constant Income

This kind allows you to resolve the insurance as desired and demand restoration of the paid-over quantities from the market worth. These are the rights that the member’s beneficiaries have upon the death of the member: the member has no right to get other than the initial contribution. This type generates relatively low returns compared to the amounts that are transferred.


This one is a combination of the above, and, as they say, the name stands for it. They thought they could cancel the insurance and liquidate the money at face value. Willing beneficiaries are those who are happy to claim benefits and get a certain percentage of the money contributed; this depends on the amount that the insured used to get before meeting his/her death.

Tax Benefits for Life Annuities

Substantial tax benefits have been realized by Spain in life and annuity insurance, especially in tackling how prices are fixed and how they shall grow as a result of the age of the insured. Life annuities are treated as income from movable capital, and the rates of tax are:

  • 5% on incomes up to €6,000
  • 6% from €6,000 to €50,000
  • 7% over €50,000

For example, if a 60-year-old person receives less than €6,000 per year (less than €500 per month), the effective rate applied is significantly reduced:

Effective rate: 0.24 x 0.19 = 0.04 or 4.56%

This was a significant relief compared to previous taxes. The taxation of life annuities is quite fair considering that commissions, investment funds, and pension plans aren’t much, unlike dissimilar instruments for savers and investors. Additionally, the actual net amount of income received increases with the advancement in the insured’s age.

Effective Tax Rates Based on Age

Here’s a breakdown of the effective tax rates based on the insured’s age:

  • Under 40 years: 17.5% of the capital is taxed; 6% effective rate
  • 40-49 years: 35% of the capital is taxed; 6.5% effective rate
  • 50-59 years: 28% of the capital is taxed; 5.32% effective rate
  • 60-65 years: 24% of the capital is taxed; 4.56% effective rate
  • 66-69 years: 20% of the capital is taxed; 3.80% effective rate
  • 70 years and older: 8% of the capital is taxed; 1% effective rate

For a €500 monthly income (€6,000 annually), the tax amounts would be as follows:

  • Under 40 years: €456 per annum on tax; €5,544 gross per annum equivalent to net salary
  • 40-49 years: €399 paid in taxes; €5,601 received as take-home pay annually
  • 50-59 years: €319.20 annual tax; €5,680.80 net annual income
  • 60-65 years: €273.60 annual tax; €5,726.40 net annual income
  • 66-69 years: €228 paid in taxes; €5,772 annual net income
  • 70 years and older: €91.20 annual tax; €5,908.80 net annual income

Life Annuities and Inheritances

Similarly, life annuities offer choices that can be helpful in managing inheritance. The contract can be structured in various ways to benefit heirs:

Capital upon Death

Beneficiaries are paid a fixed amount under the agreement when the insured passes on, as agreed. This can be given in lump sum or in proportion with the first premium. It can also be done in either forms of money or in kind.

Reversal of Income

The insured selects the beneficiary, and upon the death of the former, such a beneficiary begins to receive a certain income percentage. The total amount of money paid to the beneficiaries is derived from the premium paid by the insured. These two options also have the advantage of potentially leaving a larger sum to the inheritees or receiving as much income as possible during the insured person’s lifetime. The procedures are similar to those of pension plans in that they are not considered part of the estate; therefore, the insured can choose who will receive the money after their demise.

Risks of Annuities

As with everything in the world, not all that shines is gold, and life annuities have certain risks associated with them. These risks should be considered before investing in such products:

Irrecoverable Contributions

Annuity insurance is designed to carry out its role over the long term. It is not a liquid product, which is a major criterion for many products, especially in trading. If you choose to invest in a deferred annuity and later decide to cancel it before it starts making payments, you can lose all the money. The funds are controlled by the insurance company and are utilized for investment decisions, which may result in losses.

Low Returns

Life annuities are savings products, not investment products, and typically have lower returns. The rate of return generally ranges between 1% and 1.5%. This low return means that a high initial premium is required to receive a modest monthly income, similar to public pensions.

Bankruptcy Risk

Annuities are not insured by the Deposit Guarantee Fund (up to €100,000 if a company goes bankrupt). Consequently, divisions are supposed to be placed within the General Directorate of Insurance and Pension Funds. The Insurance Compensation Consortium will try to limit the practical representation status of the entity in case of bankruptcy and attempt to refund the money to users, but there is no guarantee of this.

Should We Go for Annuity Insurance?


  • Helps avoid the situation where you outlive your savings.
  • Reduces the amount of tax contributed according to age.
  • Offers potential tax benefits for the acquisition of investment funds or second homes.
  • Provides a variety of options depending on individual needs.


  • Low liquidity
  • Very low profitability
  • Requires a sizeable amount of capital at the start to earn modest profits
  • Not protected by the Deposit Guarantee Fund


Endowment legal expenses-backed life annuities act as a plus, providing for one’s income after retirement. They cost less in taxes as a retired person and make it impossible to exhaust your money as you age. However, they come with conditions such as low returns and the risk of forfeiting contributions if the policy is paid up before maturity or in cases of insurer bankruptcy.

The decision to choose an annuity should be based on factors such as current financial circumstances, retirement measures in place, and the degree of risk you are willing to assume. Consulting a financial planner is advisable to make the right decision concerning this product. Knowing the peculiarities of life annuities enables you to make a decision tailored to your future strategies.

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