One of the main concerns that people have about immediate needs annuities is that if they happen to die early, their premium will far exceed the payments they receive. There is a way to deal with this possibility and it is known as Capital Protection.
Capital protection is a method to insure the value of your unpaid premium for an additional cost. In case of early death, the agreed percentage of your premium is paid back into your estate by the insurance company. Obviously the proportion will reduce over time as you draw more payments.
Let’s consider an example. Suppose a client has a fund of £100,000 and would like to take Capital Protection on it while buying an annuity. The client can purchase capital protection at an additional cost, and in the event of death the insurance company would pay out the unpaid premium back to the applicant’s estate.
Say a client has an annuity from a fund of £100,000, which gives him an income of £5000 a year. If the client dies after 6 months, the amount paid out is £2500, and the unpaid premium is £97,500. Since the client passed away during the 4-6 month period, 25% of the unpaid premium will be paid back into his estate by the insurance company.
Most immediate care annuities come with an inbuilt insurance for up to six months. However, it is possible to purchase additional capital protection at extra costs. This gives your premium or estate extra protection for a certain period, in case of early death during that period.
Different providers may offer different types of capital protection plans. For instance, in addition to standard capital insurance, it may also be possible to purchase guaranteed protection that will pay out an agreed sum to your estate or beneficiaries irrespective of the time of death. While conventional capital protection reduces as more payments are made, this type of protection may have a fixed payable amount which does not reduce over time.
Value protection or capital protection annuities can be purchased for both single care annuities as well as joint care annuities. Capital protection, in addition to protecting premiums, can also be designed to protect your estate in case of early death.