8 October 2012 0 Comments

The “Spend The Kid’s Inheritance” Retirement Plan

This week I spoke to a man, age 65, who had just retired.  His wife, age 62, was just about to retire.  They each had pension plans provided through their employers, plus an additional, retirement nest egg.  Their plan was to enjoy their remaining years together and indulge themselves with all that their assets would provide; leaving only a few pennies on the date the second of them dies.  What a great estate plan!

Well, it wasn’t quite that simple because they had kids and they did want to leave something for them.  So they had already talked to another agent who showed them a $200,000 policy on each of them; $400,000 total going to their children.  Total annual premium was $6,660 which guaranteed the death benefit on each policy through age 121.  They had already dismissed the idea of term.  Term would have cost much less, but if they didn’t die within the next 20 years the premium would go out of sight and the husband’s father was still alive and well at age 95, so there was longevity in the family.

They were about to go with the $6,660 premium when I instead suggested a $400,000 Second-to-die policy guaranteed to age 121 for an annual premium of $4,248.  They didn’t need or want proceeds at the first death; other assets were sufficient to provide for the survivor.  They just wanted to leave something for their kids and grandkids to remember them by after they were both gone.  They were elated to save over $2,400 per year!

This simple concept allowed them to “spend their kid’s inheritance”, living life to the max and still leave a tidy sum as a final “love letter” to their kids.  Second-to-die policies were designed to cover the need for estate tax liquidity, but in this case it was just a final plank in a complete retirement plan.

P.S.  If they do live to ripe old ages wouldn’t they have left more by investing the premium instead of buying life insurance?  If the second of them dies in 30 years, the guaranteed Internal Rate of Return on the $400,000 life insurance proceeds is 6.62%.  If the second of them dies at the end of 40 years, it will be 3.8%.  That’s Guaranteed and Income Tax-Free.

For my next several entries I’ll be discussing how life insurance companies look at various medical conditions and how to obtain the best premium when they apply to you.

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