Reg Jones Expert's View

How may of you know what an insurable interest annuity is? Hold up you hands if you do. Hmm. No hands. That’s not surprising. In the world of survivor annuities, it’s clearly the least known.

If you are in good health and applying for a non-disability retirement, you are eligible to elect an insurable interest annuity for someone who would benefit from your continuing to be alive. Among those who are presumed to have such an interest is a current spouse, a former spouse, a blood or adoptive relative closer than first cousin, a person to whom you are engaged to be married, or someone with whom you are living in a relationship that would constitute a common-law marriage in a jurisdiction that recognizes such a marriage. If there is someone other than one of these to whom you would like to provide an insurable interest annuity, you’d have to provide an affidavit from one or more people who have personal knowledge of that financial dependency.

The rules for computing the amount and cost of an insurable interest annuity are far different from those governing a regular survivor annuity. The amount the designee will receive is 50 percent of your reduced annuity. The reduction in your annuity is computed as follows:

  • 10 percent if the person is the same age, older than, or less than 5 years younger than you;

  • 15 percent if 5 but less than 10 years younger;

  • 20 percent if 10 but less than 15 years younger;

  • 25 percent if 15 but less than 20 years younger;

  • 30 percent if 20 but less than 25 years younger;

  • 35 percent if 25 but less than 30 years younger; and

  • 40 percent if 30 or more years younger than you.

Well, there you are. Now you know what an insurable interest annuity is and have probably guessed why it is not very well known. It’s because very few people ever feel the need to make such an election. However, it is an invaluable tool when the welfare of someone important to you would be in jeopardy if you did not make such an arrangement, for example, a child who became incapable of self-support after age 18 or a common-law spouse who would be ineligible to receive a regular survivor annuity. The government deserves credit for creating this wrinkle in the law, even if the impact on a retiree’s own pocketbook can be substantial.