In the South African context, it’s important to clarify the terms being used first. A “life policy” typically refers to a life insurance policy, which is designed to pay a lump sum to your beneficiaries upon your death. However, if by “life policy” you mean a life annuity, the response changes, so I’ll cover both scenarios for clarity.

1. Life insurance policy vs living annuity

A life insurance policy and a living annuity serve different purposes in a financial plan. A life insurance policy provides financial protection for your dependants by paying a lump sum upon your death. This payout is often used to settle debts, provide for education, or cover living expenses.

A living annuity, on the other hand, is a retirement income product bought with the proceeds from your pension, provident, or retirement annuity upon reaching retirement. It is designed to provide you with a regular income, with annual withdrawals ranging from 2.5% to 17.5% of the investment value.

You cannot convert a life insurance policy into a living annuity. These two products are fundamentally different. A life insurance policy does not have the same tax structure or retirement status required for a living annuity. Once a life insurance policy pays out (typically tax-free), it is up to the beneficiaries to decide how to use the funds, and it is not directly eligible for conversion into a retirement product.

2. Life annuity vs living annuity

However, if you are referring to a life annuity when you mention a “life policy”, the situation is different. A life annuity is a product purchased at retirement that provides a guaranteed income for life, and it is often used when retirees want certainty in their income stream. In contrast, a living annuity offers more flexibility in income withdrawal but places the investment risk on the retiree.

While both a life annuity and a living annuity provide retirement income, you cannot convert a life annuity into a living annuity.

Once you commit to a life annuity, the terms are generally fixed, and the income is guaranteed for life, regardless of market performance. A life annuity is non-reversible, meaning you cannot switch or transfer the annuity into a living annuity for more flexibility.

From the insurer’s perspective, a life annuity is not reversible because it is based on actuarial calculations that guarantee a fixed income for the annuitant’s lifetime. Reversing it would disrupt the risk pooling and financial commitments the insurer has made to support that guaranteed payout.

What you can do

If you are still in the decision-making phase and haven’t yet purchased a life annuity, it might be worth considering a living annuity if flexibility is your priority. Living annuities allow you to adjust your income and offer the potential for investment growth. However, they come with the risk that your investment may not perform well enough to sustain your income for life.

As always, it’s advisable to consult with a financial advisor who specialises in retirement planning to explore your specific needs and ensure you make the right choice based on your financial situation.

Article credit Can I convert a life policy into a living annuity? – Moneyweb