So I'm sitting at my desk, working on some quotes, when the phone buzzes: Mary Thomas [ed: not her real name] is on line 2, has some questions about life insurance. If only it had been that simple...
Mary is a soon-to-be retired schoolteacher, as is her husband, Marv. She's 58, he's 67 but still teaching. As part of her retirement package, she's been offered a choice of annuity payouts, and her financial advisor has suggested that she choose the one with the highest payout (monthly benefit), but which will also stop at her demise. He's recommending a life insurance policy that would (essentially) continue the income stream if she predeceases Marv.
This is a fairly common strategy. We even have a term for it: pension maximization ("pension max").The idea is that one can calculate the present value of that income stream, and then insure it with a life insurance policy. The advisor had recommended, and then sold her, a 15 year level term plan. Mary had called me because she had some reservations, and wanted a second opinion from an independent insurance agent.
I was happy to oblige.
My first concern was her advisor's ethics problem. I have nothing against fee-based planners per se, but when that same planner not only recommends, but also sells the policy, that is an insurmountable conflict of interest. Fee or commission, not both. My other concern was the inappropriate policy choice.
Let's talk about that.
Term insurance, which is "pure" protection, has many uses, and I sell a lot of it. It's often heralded (inaccurately) as the "least expensive" form of life insurance. The challenge is that it's a temporary solution: it's good for mortgage protection (20 years is 20 years) or if one's raising a family (in theory, at least, Little Johnny will be out of the house in 20 years or so). But it is not a good choice for more long-term needs (final expenses, estate issues, etc). In this case, the advisor was recommending a short term (or temporary) solution for what is, in reality, a long term (or permanent problem): when is Mary going to die?
We went round and round on that, until I asked her a question: why didn't she look for an annuity choice that only paid for 15 years? Surely that would be a larger monthly benefit, and who knows if she'd even live that long? She hesitated, then replied, "but what if I live longer?"
Silence can be golden.
Mary then asked me what I would recommend. I explained (again) that this was a permanent problem, so I would recommend a permanent solution. Whole life would do the trick, but can be terribly expensive at her age. "Regular" Universal Life might work, but lacks the guaranteed death benefit of Whole Life, and I wasn't too keen on going that route. I offered two suggestions:
First, a newer form of Universal Life, which (as long as the premium is paid) offers a guaranteed death benefit payable to age 120 (although premiums would stop at age 100). This plan had no cash value buildup to speak of, but since that wasn't really a goal here, it didn't matter. What did matter was that it would last as long as she needed it to, guaranteed.
My second choice was also a newer type of plan, a kind of hybrid called Return of Premium term. This plan was built on a term chassis but, at the end of the level term premium (e.g. 15 years) gave her a guaranteed, paid-up policy. Simply put, if she dies in the first 15 years, the full face amount would be paid. After 15 years, a lesser amount would be paid, but no premiums would have to be paid after that 15th year.
I explained that option one was a full, permanent solution to a permanent problem, while option two was a permanent "partial" solution. Either one was clearly (to me, at least) superior to the poor advice given by her financial advisor.
Which one, if either, will she choose? I really don't know. Mary really didn't like to think of this as a permanent problem, and who can blame her? But she called me, so something must have been bothering her about the status quo.
We'll have to wait and see.
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