Longevity Insurance, Protect Me and My Kid too!

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Longevity insurance protection is the purchase of a fixed and scheduled income (usually monthly) permanent annuity contract that is priced today and supports a known annual income many decades from now, all guaranteed by the issuing life insurance company. Typically, the initial annuity income payment date occurs on or after your age 80. Annuity pricing mechanics have to do with interest rates and an estimate of how long you and others like yourself will survive. The guaranteed income supported by the insurance company is much higher than you can achieve on your own when; you typically don’t consider other individuals lifetime expectations of your same age and gender. Having a known future income now, helps to plan for the initial intervening years when, financial markets and events in your life are unknown and being such; can negativity impact your long-term prospects of successfully financing retirement.

This being said; many reasonable consumers like the idea of insuring some portion of their future income. This makes sense as consumers insure other areas of their lives. Insurance improves the quality of life because; you know you have a backstop should something go wrong. Another thing, consumers really like the idea of having others such as; spouses, children and even possibly grandchildren benefit from the annuity purchase cost they pay to to the life insurance company for such insurance. Let’s look at the following case examples.

Situation: After listening to all the retirement income experts, Dad really bought into protecting his longevity risk but, he is reluctant to pull the trigger unless another or multiple family members can also benefit from the annuity contract. Also, wise, experienced and realistic Dad; because, he knows family circumstances may change after the contract is issued, wants to be reasonably assured he will actually receive the income such a multi-decade contract confers. Also, Dad really wants to help Son who; is financially struggling, to secure his own future income. So, challenging but realistic client demands for the independent insurance agent to meet.

Purchase/Case Circumstances: Father age 70/Son age 45, $100,000 non-qualified (post income tax funds) annuity purchase cost, Father and Son, Joint Survivor (JS) with 100% benefit (income) paid to any survivor, installment refund of the annuity purchase cost (paid over time) to the Beneficiary, initial payment starts 20 years from now. Purchase State Florida (my State!). Son is married and has a son (Grandson) of his own, age 20. 

As wealthy Father has all the money in this family dynamic, Father purchases the contract and names his Son the Owner and “Primary” Annuitant (insured), Father goes on the annuity contract as the “Secondary” Annuitant (insured).

Father protects his longevity risk of running out of money at age 90 and beyond should he survive until that time. Son, after paying tax on the income, now has money to help out dad if, Dad needs it.  Dad also knows, because of the contract’s design, Son can’t “re-purpose” the annuity purchase cost gift to Son after the purchase date. As a gift, the contract and its future income will always reside in the Son’s non-marital estate (separate property). Unlike other parental property gifts that can’t be so insulated from the economic vagrancy of a long-term marriage, the contract’s design keeps it from becoming “transmuted”, (the mechanical process by which property changes status) from separate to marital property. Because Florida is a “homestead” annuity State, Son receives maximum State creditor protection as well.

 Looking at the numbers (JS 100% Survivor):  What is Son/Dad going to get (carrier estimate blend) at Dad’s age 90? He receives a $920.00 monthly income with a taxable portion of $530.00 so, about $11,000 annually. Not too bad for a $100,000 annuity purchase cost considering, much younger Son is also an Annuitant on the contract.

Of course, the rub is, one of them has to survive 20 years to collect the income. The likely scenario is; Dad predeceases Son prior to the initial payment commencement date. If this occurs, Dad simply comes off the contract; Son maintains Ownership and starts to collect the income at his age 65. At time of application Son names his Son (Grandson) as a contract “Secondary” Beneficiary. In the unlikely event, Son predeceases Father, contract has to distribute under IRS “Death of Owner Rule”. Father is named “Primary” Beneficiary on the application and he receives a lump sum return of his $100,000 annuity purchase cost. If Father and Son deaths occur, with one surviving past the initial payment date then, estate benefits of non-taxable annuity purchase cost refund at the $920.00 monthly rate to the contract Secondary Beneficiary (Grandson) over approximately 6 – 7 years, the installment refund period, but depending on the remaining guaranteed benefit (if any) at the time of the last Annuitant’s death. If neither Annuitant makes it to 20 years, Grandson picks up the full $100,000 lump sum annuity purchase cost.

Super Size Dad’s Income

The above is all well and good. However, let’s change the family circumstances. Son (much wealthier than average) and in a slightly different personal financial situation, has a burgeoning medical/law practice and at this point in time, does not anticipate needing Dad’s gift. In fact, Dad is going to need a lot more monthly income than $920.00. So, let’s super size Dad’s age 90 income without increasing the $100,000 annuity purchase cost!

Looking at the numbers (JS 50% Survivor to Son-Only):  Because the income is more important to Dad than Son, this arrangement kicks Dad’s monthly income up to $1,300.00 or $15,600 per year at age 90 for as long as he survives (regardless of what happens to son). Now we’re talking! If Dad doesn’t make it or dies during the installment refund period, Son collects the $15,600 in annual income until the installment refund period completes (6 – 7 years and would be paid until son is age 71 – 72) then, at that time (if Son continues to survive), the monthly payment reduces (50%) to $650.00 or $7,800.00 annually. After the payment commencement date and following Father’s death then, following Son’s death, Secondary Beneficiary (Grandson) picks up any remaining installment refund payment. Of course, just as before, if neither Annuitant makes it to 20 years, Grandson picks up the full $100,000 annuity purchase cost.

A contract placement concern is; with the 50% payment reduction pegged to only upon the Father’s death, the inventory of available contracts is severely reduced from the all ready skimpy contract inventory that supports “non-spousal” JS Annuitants. In reality, you might only have a couple of carriers and contracts to select from.

Son Has the Spare Change to Help Dad

If married wealthy and definitely not average Son, has the spare change to help Dad out right, an alternative is; to make a single cash gift ($100,000) or a series of cash gifts to Dad. Then, let Dad purchase his own annuity contract considering his lifetime only. Such a contract, with an annuity purchase cost installment refund will support a lifetime monthly income of $3,600.00 (carrier estimate blend) or $43,200.00 annually with about $26,400.00 taxable starting at his age 90. So, not helping Son as before, pays off for Dad. However, in this case, if Dad (as the sole and much older Annuitant) dies following the initial income date and after the installment refund period (about 2 – 3 years following the initial income date), the contract will terminate without further value. Married couples need to be in agreement otherwise, deferred income meant for Dad, could turn into a marital property claim by the soon to be ex-spouse, preventing Father from receiving a large portion or any of the needed income.

A married couple, “in agreement” to the marital property cash gift(s), could then be listed as “irrevocable” Beneficiaries in equal shares on the contract for the deferral period (the 20 year period of time prior to the initial income start date, Dad’s age 90) for a return of the $100,000 annuity purchase cost. This way, no Owner or Power of Attorney (POA), in the future, can manipulate the application Beneficiary status without both Beneficiaries written consent protecting their long-term marital financial interests. The carrier has to be willing to manage the in-force contract with irrevocable Beneficiary designations. Not all carriers offer this administration feature so, you need to make sure the insurance agent checks this out prior to purchasing the contract.

But, there you have it, a nice tidy way of getting Dad some longevity insurance while still protecting and providing for other family members, any one in?

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