What's Next: Longevity Insurance

Column for What’s Next website LONGEVITY INSURANCE

By Mark Levine The last thing you should be worrying about is dying young. Having made it through your teens, odds are you’re going to make it past 80. There’s actually a far greater chance of your grandchildren visiting you in a nursing home than your never meeting them. Your biggest worry should be living too long, and as a result, running out of money.

Besides, which do you think is better for you: planning to live to 100, or worrying about dropping dead at 60?

Forget about spending time and money shopping for life insurance and planning your estate. What you really need is longevity insurance: income streams guaranteed to last as long as you do. While no insurer has put together a package of coverages and called it longevity insurance, you and your financial advisers can easily create customized protection which will guarantee you can’t out live your money. Here’s a step by step plan you can use as a template: STEP 1: PROTECT YOUR INCOME Your chances of being disabled, at least temporarily, are six times greater than dying. Get adequate long term disability coverage so you know you’ll always have an income to potentially outlive. That means not relying on your employer’s coverage, Workers Compensation or Social Security. Employer plans provide too little money for too short periods of time (only three years on average). Workers Comp covers only job-related injuries. And Social Security disability has absurd qualification requirements; a brain surgeon who suffers extensive hand injuries but who could still flip burgers doesn’t quality.

Look for a guaranteed renewable policy with income replacement coverage. That means the policy can’t be canceled as long as you pay the premium and that disability is defined as a drop in income due to illness or injury.

Look for benefits equal to 60 percent of your net income, that don’t start until 120 days after you become disabled, and that last until you’re 65. You don’t need any more since your expenses will drop if your disabled and the benefits from policies on which you pay the premium are tax free. Plan on living off your savings for a few months and you’ll save a fortune in premiums. And once you hit 65 retirement benefits can serve as your replacement income.

STEP 2: THINK LONG TERM Forty three percent of those who reach 65 will spend some time in a nursing home; 25 percent will stay for at least a year; ten percent, five years or more. At an annual cost of $30,000 to $50,000, this could be the leading cause of your running out of money. If you’re affluent you’ll probably be able to foot the bill. If you’re poor the government will pick up the tab. But if you’re middle class you’ll need long term care insurance.

These policies are admittedly expensive and complex. However it is possible to get adequate coverage at a good price (around $700 a year) if you buy it at age 55. Make sure the policy covers care in a nursing home and in your own home and that your own doctor, rather than the insurer determines what is medically necessary. Opt for a benefit large enough to cover all your costs and give serious consideration to an inflation adjustment rider. You can save money by choosing a 100-day waiting period and having benefits last only long enough for you to successfully transfer assets to qualify for Medicaid coverage.

STEP 3: ANNUITIZE YOUR ASSETS Single premium, immediate fixed annuities are the ultimate form of longevity insurance. Basically, you give an insurance company a lump sum of money, and in return, the insurer promises to pay you a certain amount of money monthly for the rest of your life. Yields run from seven to 12 percent depending on your age. The amount of the payment is guaranteed and it partly tax free since some of what you’re receiving is actually repayment of principle.

When your income begins dropping, say at age 70, start withdrawing some of your non-qualified savings—those not in tax deferred plans—to buy an annuity. Buy just enough to compensate for your drop in income. As your income continues to drop, keep buying annuities sufficient to make up the difference. Spreading out your purchases this way mitigates inflation impact and also maximizes your yields since the older you are, the higher an annuity income you’ll receive. Just don’t put all your eggs in one basket: buy from more than one insurer, and

double check that each is rated highly.

STEP 4: MORTGAGE YOUR FUTURE Traditional wisdom is there’s nothing better than a paid off mortgage. In some cases that still makes sense. But on the other hand mortgages can be great tools to maximize your longevity insurance. How? By taking the equity you’ve sunk in a home and turning it into lifelong income.

If you plan on staying in an already paid-up home, a reverse mortgage can provide you with a tax-free income, once again guaranteed to last your entire life. Reverse mortgages are loans, secured by your home, paid out in monthly installments. The monthly payments are tax free since they’re loan proceeds not income. In effect, the bank is paying you to live in your home. When you die, the loan comes due. It’s almost always paid off by selling the property. If that doesn’t yield sufficient funds to pay off the loan, the bank takes the hit. On the other hand, if it generates more the bank pockets the profit.

If you plan on buying a new home when you’re older, don’t jump at paying cash. A borrower’s age has no bearing on a mortgage decision: 75-year-olds can obtain 30-year mortgages just as easily as 25-year-olds. By taking out a mortgage you get to spend or invest the proceeds from the sale of a previous home, potentially creating yet another lifelong stream of income. Buy reducing term life insurance from your mortgage lender and you won’t even have to worry about your estate having enough money to repay the loan when you die.

STEP 5: GET “SCIN”ED ALIVE You may not need to be able to receive all cash when you sell a valuable asset. Rather than simply agreeing to an installment payment plan, ask for a SCIN, a self-canceling installment note. These are notes which, while due by a certain date, are canceled if you die before then. Because of this provision buyers will gladly pay a higher interest rate (based on IRS actuarial tables) on the unpaid obligation than otherwise. Once again you get a maximized and guaranteed lifelong income.

STEP 6: CASH IN YOUR COVERAGE If you’ve already fallen victim to insurance industry propaganda and have money tied up in whole life insurance policies, don’t despair. There are a number of ways you can turn those policies into cash which can, in turn, become income streams.

The most obvious way is to cancel a policy and pocket its cash value. This may have tax consequences, however.

Another technique is to borrow against your policies. The proceeds are tax free and the loans will be paid off by the death benefit.

Finally, you could actually sell your death benefit to someone else. Called viaticals, these sales have previously been limited to individuals who had one year or less to live. Today, however, there are viable financial groups which will buy the policies of those projected to live another ten years. Prices are once again based on IRS actuarial tables and your physical condition.

Cashing in your own death benefits may initially seem a bit extreme. But remember: those dollars can’t help you when you’re dead and they can do a lot of good for you, and perhaps your family, while you’re alive.