23 April 2014 0 Comments

The Catch to my “Live it up or Leave it” Solution

shutterstock_102236824In my last entry I showed how a couple could guarantee delivery of $250,000 when the second of them died by purchasing a Second-to-Die policy for a single premium of only $76,565, allowing them to live it up during their retirement while fulfilling their dreams of a legacy for their grandkids.  When some people look at these numbers they figure it’s too good to be true; there must be a catch.  Well, yes, there is.

The major catch is that it can be very costly if you change your mind after purchasing the policy.  If the couple in my example (Husband age 70 and Wife age 68) decided they really needed the premium they spent on the insurance for living expenses and wanted to terminate the policy, they would get back much less than the $76,565 they had paid.  There would be an immediate drop in  value with a continued annual decrease every year until the policy’s cash surrender value was zero.  The fact that the surrender value vanishes does not affect the $250,000 guaranteed death benefit.  It is guaranteed to the wife’s age 120 with no future premium required.  They just must be sure that this is really what they want before proceeding and that remaining assets are sufficient to support their lifestyle and future needs.

Since the single premium guarantees the death benefit for life, the only other thing of concern  is the financial strength of the insurance company.  The issuing company in this instance is an A+ Best’s rated company that has been in operation well over 100 years.  This premium also assumes they can qualify for the best premium class based on their medical and family histories.

Instead of making a single premium payment of $76,565, they could have produced the same $250,000 guaranteed death benefit by paying $7,479 each year.  This level premium approach would produce a better rate of return through about the 17th year, so if one of them is still living at that point—which is highly probable—the single payment option outperforms the annual payment method.

If the concept of guaranteeing a legacy without eating into your retirement lifestyle makes sense to you, ask your agent to determine the best company for each payment plan based on your current insurability—and—be sure to ask to see the death benefit’s Internal Rate of Return.

Next…the good, the bad and the ugly of annuities taking into account the latest in policy design.

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