From time to time, I am asked questions about a matter appearing in these commentaries. I respond directly to the questioner, but thought it might be a good idea to share some of the questions with the readership. If you have any questions, please call or email.
The first question was from a prospect who liked my presentation, but questioned the necessity of the life insurance because he thought the odds of him dying were so small. Long time readers know the odds of dying are 100%. As Keynes said, “In the long run, we’re all dead.” But regardless of the odds, life insurance is a necessity for those who have anyone financially dependent on them.
In thinking about odds, it’s important to keep things in perspective. Mortality tables show that there are 1.24 deaths per thousand males age 35, or a little over one-tenth of one percent. In the pre-vaccine days (1950-1955), the odds of a child contracting polio were one in 9,586, or a little over one-hundredth of one percent. But parents in the 1950s embraced the vaccine, because even one-hundredth of one percent was too big of a chance to take.
The second question was regarding single premium immediate annuities (SPIA). The questioner wanted to know if they could be procured without the life insurance (of course) and if so, was it a prudent way to increase yields (that depends).
There are several options as to how long a SPIA will provide income. As an example, the following are quotes for a male age 70 with a $100,000 investment (actual payments offered as of today from one particular company). The highest payout is life only, which produces $639.48/month ($7,673.76/year). Of course the downside to that is that the payments cease at the death of the annuitant, so an early demise could result in the loss of capital, unless combined with a life insurance policy.
For a person with no dependents that might not be catastrophic, but it wouldn’t be efficient either. The next highest payout is life with a period certain, meaning payment will be made for life with a minimum of X years. In my example, life with a 10 year period certain would generate $620.11/month for life, but if the annuitant died in year 8, the beneficiary would receive the last two years payments, and life with a 20 year period certain would generate $534.08/month.
The next two options are refund options, which provide the beneficiary with the difference between the amount invested and the total amount received up to death. If the annuitant dies having already received the entire principal, the beneficiary receives nothing. If he dies before he has received the entire principal, the beneficiary will receive the difference, either as a lump sum or as continued installments.
I hope you found this format informative. If enough people like it, I will make it a regular feature. If you have any questions, shoot me an email and, if appropriate, I will answer it in a future Commentary. And as always, thanks for reading.