Tuesday, July 21, 2015

Reverting to type

Recently, I received an email touting a new (to me, anyway) product called a "reversionary annuity." Having never heard the term before, I was intrigued, and so I reached out to the email's sender, Nancy Woo for an explanation and an example.

Reversionary anntuities are a riff on Pension Max (maximization):

"A retirement income strategy that combines an insurance policy with an immediate annuity to provide for a surviving spouse ... upon the insured's death, the beneficiary receives a guaranteed lifetime income instead of a lump sum payment."

Seems simple enough, and quite on-track with traditional Pension Max, but I wondered about the mechanics; that is, how would one of these work? Ms Woo was kind enough to send me an illustration, along with this explanation:

"In our case study, we have a 56 year old male client who can choose to take a life only pension for $3,042/mo or the joint life 100% survivor at $2,434/mo. We can replace the survivor’s $2,434/mo for only $249/mo in premium.

In doing so, we’re saving the client $359/mo.  Assuming the client is insurable and healthy, this is the most ideal alternative. The present value of the future monthly survivor income stream is $362,035.56. The cost of a guaranteed fixed UL to age 100 would run him $377/mo. Also you’ll see that the income paid out the beneficiary is treated as an annuity income with an exclusion ratio, so the beneficiary will have more after tax income than the pension

That last is pretty important: it means that, net-net, the client's beneficiary would come out ahead (if even just a bit). So, another interesting retirement planning tool for folks with an eye to the future.
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