As a senior, I know all too well the financial concerns facing this fast-growing population segment. Projections by the United States Census Bureau indicate that between 2005 and 2030, the seniors market will grow by 81%.
If ages 55 and up are included in that population, 17 to 21 million more consumers will be added during that period.
Because of the inherent lack of specialized life products, however, many life producers have opted to market to this huge segment such health-related and annuity products as long-term care, critical illness, and retirement annuities.
This has left seniors needing life insurance without a satisfactory product solution.
Some producers still offer term insurance, but term products are affordable because only a few policies actually go to claim.
I have seen a statistics memo that cites a Penn State study and indicates that only 10% of all term policies actually survive the term period, and then only 1% actually pay a claim.
If this is true, 99% of these clients' survivors are left without a life insurance solution. They are forced to self-insure their entire financial futures.
Before I comment on permanent life insurance plans, I must identify exactly why seniors need life insurance.
I'm sure all producers have had that call from a distraught beneficiary, telling them that her husband (a client and the company's insured) has died and asking for help in filing his death claim.
All this widow can think about is her emotional loss and the pressing financial question now facing her: Is there enough money to pay the funeral expenses?
Most producer involvement stops with the claim check's delivery. Many miss out on the next emotional crisis.
Sometime later the widow must face the following questions: How much income safely can be generated from the sources available? Will the income be sufficient to support her living expenses? Will that income last her lifetime?
Permanent insurance plans are not the solution for most clients because they cannot afford the premiums.
For example, assuming the survivor's age to be 60, it would require a death benefit of about $193,686 to support $1,000 a month lifetime income, and $387,372 to provide $2,000 a month. (These figures are based on single-premium immediate annuity [SPIA] illustrations from Baltimore Life.)
But now a specialized and affordable kind of life insurance specifically addresses the surviving senior's income needs. It is called a reversionary annuity.
This becomes a lifetime annuity upon the insured's death, much like a traditional insurance plan's settlement option. Unlike those plans, however, the reversionary annuity is much more affordable.
To say it another way, the reversionary annuity premium dollar buys lifetime coverage and more income than term or permanent plans.
How is this possible? It is primarily because the reversionary annuity has only one beneficiary -- it has no contingent beneficiary. A reversionary annuity's income benefit is conditioned upon the beneficiary's survival beyond the life of the insured.
With the reversionary annuity, the insured and beneficiary both are underwritten. If the beneficiary is medically impaired (more likely to die first), the plan's premium is reduced.
How much less would premiums be if a term or permanent plan had no contingent beneficiaries? The answer: about 50% less.
To look at it from a premium point of view, the beneficiary's income benefit could be increased by about 100% if a term or permanent life plan did not have a contingent beneficiary.
This life insurance plan is more affordable and provides lifetime income for the survivor.
For most seniors, their children are grown and have jobs, so the primary need is to provide for their spouses should something happen to them.
For the surviving spouse, there is no substitute for an adequate lifetime income. Let me provide an example of the reversionary annuity's first death claim.
Because of the significant losses in his IRA and other investments, the client, Tom, talked to his life producer about insurance that would provide a lifetime income for his wife upon his death.
Tom had a $260,000 universal life policy with a cash value of $72,845. He asked how much lifetime income this policy would produce for his wife.
If she were to buy an SPIA with the death benefit, it would provide about $1,618.53 a month for life. Tom's response: "She cannot live on $1,618.53 a month!"
The producer, knowing about the reversionary annuity, recommended that Tom terminate the UL policy and use its cash value to pay up a reversionary annuity completely.
The funding of the reversionary annuity with another life product's cash value may have taxation issues that need to be addressed. In my experience, companies have taken different positions on this issue.
In this example, the company applied the cash value directly to the reversionary annuity under IRS Section 1035.
Others have opted to do a Section 1035 exchange on the cash value into an SPIA first, then used the SPIA income to fund the reversionary annuity premium. In either case, the client's financial leverage is significant.
This plan would provide Tom's wife with $3,190.06 a month for life -- saving Tom $7,401.43 annually, the premium he was paying for the UL.
Tom was not finished. He then decided to purchase a second reversionary annuity, using the $7,401.43 he was saving. This premium provided his spouse additional protection with a lifetime income of $2,592.49 more a month.
Tom suddenly died of a heart attack.
Rather than having a death benefit of $260,000 that would support an income of $1,618.53, his wife received a total survivor benefit from the reversionary annuities of $5,782.55 a month for life.
Alternatively, Tom could have bought only the second reversionary annuity. In doing so, he substantially would have increased the survivor's income benefit ($1,618.53 vs. $2,592.49 a month), and then he could have used the cash value to reduce their retirement expenses.
The critic will point out that the children don't receive a benefit from the reversionary annuity coverage. That is correct, but what children would want their widowed parents to receive $1,618.53 a month as compared to $5,782.55?
With an adequate survivor income, the probability is that there will be a children's legacy. The equity in the home and other personal assets will not have to be sold to provide the needed income.
What happens if Tom's wife dies first? The reversionary annuity terminates, as it no longer is needed to provide income, but the return-of-premium rider returns to Tom all the premium he had paid. In this event, Tom's net cost of the coverage is $0.
Producers can find a company that offers a reversionary annuity and offer it to the ever-increasing senior market.
The reversionary annuity puts seniors on the prospect list in large numbers.
