At the end of a pension insurance contract, most people choose between a lump-sum payout and an annuity – and those who choose the annuity are typically looking for security: a predictable monthly income alongside their pension. As a broker, I see that one question is almost never asked with this decision, even though it carries the highest stakes: what happens to the money if the annuitant dies? The answer differs fundamentally from one annuity type to another. In one version, the insurer stops paying on the day of death and keeps the unused reserve; in the other, the remaining annuity payments go to the family. Since Hungarian policy conditions typically do not allow surrender while the annuity is being paid, this decision cannot be corrected later. This article sets out the types, the rules for the event of death, the tax framework and the points to weigh – so that the annuity is a conscious choice rather than a surprise.
- A pure, lifelong life annuity is paid until the annuitant's death: payments stop on death, and the unused reserve stays with the insurer, in the risk pool – this is the price of the annuity being paid even if someone lives to a hundred.
- With a life annuity taken out with a fixed (certain) annuity period and with a fixed-term annuity, the insurer pays during the specified period regardless of whether the annuitant is alive: after death, the remaining annuity payments go to the beneficiary, in a way that differs from insurer to insurer – as an annuity or commuted to a lump sum.
- Under Hungarian policy conditions the annuity decision is typically irreversible: there is no surrender once payments have started, so the type, the length of the certain period and the naming of the beneficiary make up the highest-stakes, one-off decision of the endgame.
Where does the annuity come from, and why is there no way back?
When the pension benefit becomes available, the insurer converts the savings accumulated over the term of the pension insurance into an annuity – if the insured person requests this: the accumulated amount is paid as a single premium into an annuity insurance policy, from which the insurer pays a monthly amount according to its own annuity table. Some insurers fix the conversion factors as early as when the pension insurance is taken out, while others apply the rates in force when the payments start – this differs from insurer to insurer, and it is worth asking about it before taking out the policy, because decades later this is what determines the monthly amount. As soon as the annuity starts, the money is no longer savings in the insured person's account but the insurer's benefit reserve: Hungarian annuity conditions – for example, GRAWE's 2016 general annuity conditions – exclude surrender, policy loans and paid-up conversion during the payment phase, and allow a lump-sum commutation only in specified cases. The two routes are compared in the lump sum or annuity article; here I focus on the rules for the event of death.
Pure life annuity: paid as long as you live – and only that long
The lifelong life annuity without a certain period is the simplest and at the same time the most misunderstood type. The insurer pays until the annuitant's death, however long they live – this is genuine cover against the risk of a long life, which no other form of savings provides. The price is that payments stop on death: if the annuitant dies in the second year, most of the capital paid in stays with the insurer, and the beneficiary or the heir receives nothing. This is not the insurer's “profit” but how the risk pool works: from the reserves of those who die early, the insurer pays those who live longer than calculated. In return, a pure life annuity pays the highest monthly amount from the same capital. So for someone who would like to leave an inheritance, or who expects a shorter life because of their health, this type is rarely a good choice; but for someone who lives alone and whose greatest fear is that “the money will run out”, it provides exactly that.
Certain annuity period: the compromise most people are looking for
Several Hungarian annuity products offer the life annuity with a fixed (certain) annuity period – the length you can choose differs from insurer to insurer and is typically set in whole years, for example 5, 10, 15 or 20 years. During this period, the insurer undertakes to make the payments regardless of whether the annuitant is alive: if the annuitant dies during the period, the remaining annuity payments go to the beneficiary. Under GRAWE's conditions, the beneficiary may in that case also request a lump-sum commutation of the remaining annuity, and if there is no valid beneficiary designation, the insurer pays the commutation value for the remaining period to the insured person's heir – with other insurers the remaining amount continues to be paid as an annuity; this depends on the policy conditions. After the certain period ends, the annuity is again paid only until the annuitant's death. The price of a longer certain period is a lower monthly amount: from the same capital, the insurer takes on a longer fixed obligation. In practice, this type offers a balance between lifelong income and inheritability.
Fixed-term and joint-life annuities
With a fixed-term (temporary) annuity, the insurer pays for a period fixed in advance – typically 5–20 years – after which payments stop even if the annuitant is still alive. Here, the rule for the event of death depends on the wording of the policy conditions: if the whole term is independent of whether the annuitant is alive, the remaining payments go to the beneficiary; if the conditions set the term as “at most until the annuitant's death”, payments end on death. In GRAWE's product, for example, the fixed term is at least one year longer than the certain period, which means that part of the term is certain and the rest depends on survival. This is the phrase – “regardless of whether the insured person is alive” – that you need to look for in the conditions, because it decides what can be inherited. With a joint-life annuity, or one with a survivor transfer (járadékátvitel), after the first insured person's death the insurer continues to pay a predetermined part of the annuity – for example half or two-thirds – to the second insured person, typically the spouse – depending on the conditions, until that person's death or for a specified period. This is the classic solution for married couples: it protects not the heirs' income but the surviving spouse's.
The tax framework: the 10-year rule and the HUF 5,000 threshold
For the annuity benefit of pension insurance, Section 3, point 93 of the Personal Income Tax Act (Szja tv.) sets two important rules. The first is a way of bridging the 10-year rule: if the pension benefit would become available within 10 years of the contract's conclusion, the benefit remains a pension benefit if it is provided as a non-decreasing annuity that lasts at least until the end of the 10th year from the conclusion of the contract or until the insured person's death – so the annuity is a tool for allowing a younger contract to close with a tax-free benefit as well, as detailed in the article on the 10-year rule. The second is the small-amounts rule: if the expected monthly amount of the annuity calculated up to the end of the 10th year does not reach HUF 5,000, the insurer may pay the annuity as a lump sum even before the 10th year has elapsed. The general framework of annuity taxation is shown in the article on the taxation of the payout; because of the “non-decreasing” condition, it is worth checking that the chosen annuity cannot fall below the base annuity even if the bonus or excess-return part decreases – under GRAWE's conditions, for example, the total annuity may decrease, but not below the base annuity.
What should you decide before signing?
- Ask the insurer in writing for the annuity types available and, for each, the rule for the event of death: payments stop, continue to the beneficiary, or can be commuted to a lump sum.
- Ask for the monthly amount calculated on the same capital for a pure life annuity and for certain periods of 10, 15 and 20 years – the difference shows what inheritability costs.
- Name a beneficiary on the annuity insurance too, not only on the pension insurance; without a designation, the commutation value of the remaining annuity goes to the insured person's heir, whose status as heir the insurer typically accepts when it is proven by the documents of the probate proceedings, as described in the article on inheritance.
- Check how the annuity is indexed: the base annuity is fixed, while the part derived from excess returns may change – because of the “non-decreasing” tax condition, the base annuity is the benchmark.
- Consider a mixed solution: part as a lump sum, the rest as an annuity – Hungarian policy conditions typically allow this, and it is another way of separating the two goals, income and inheritance.
Choosing an annuity is the only decision in a pension insurance contract that cannot be undone later. If you let me know, I will help where I can; the choice and the signature are yours.
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Sources
- Personal Income Tax Act (Szja tv., Act CXVII of 1995) Section 3 point 93 – definition of pension insurance: non-decreasing annuity until the end of the 10th year or the insured person's death; the HUF 5,000 monthly threshold
- GRAWE Életbiztosító: General Annuity Insurance Conditions (Általános Járadékbiztosítási Feltételek, 1 July 2016) – annuity with a certain period and fixed-term annuity, survivor transfer, lump-sum commutation, exclusion of surrender, base and bonus annuity
- Hungarian Civil Code (Ptk., Act V of 2013) Section 6:478 – in the absence of a beneficiary, the insured person's heir is the beneficiary
