You’ve got to hand it to the insurance industry’s ingenuity in inventing new types of insurance. While many of these policies are of dubious value, a fairly new species of coverage may in some instances be a worthy alternative to expensive long-term care insurance, or purely for providing an income boost later in life. Longevity insurance, also called “retirement income insurance” will pay you a lifetime income commencing at a later age in exchange for a lump sum payment. (The actuaries, always eager to obfuscate, call them “advanced life-delayed annuities.”) For example, here’s what you get in exchange for a lump sum payment of $50,000 at age 60 with benefits starting at age 85. If a female policyholder survives until age 85 (that’s a big “if,” of course), the policy would pay $34,000 for life each year thereafter. If a male policyholder survives until age 85 (that’s a bigger “if”), the policy would pay a lifetime emolument of $46,000 per annum.
Beware of the fine print. There are all sorts of variations on this theme, some of which offer a refund should you die before the age when the payout commences. But these additional bells and whistles come at a big price in the form of a much lower ultimate benefit. If you’re buying insurance as a substitute for LTC coverage, you want pure coverage, unadulterated by features you don’t need but pay dearly for. By the way, that goes for all types of insurance. In most instances, select old-fashioned basic coverage.
An alternative: Homemade retirement income annuity. If you’re not too enthralled with the above insurance policy, you could alternatively create your own, in actuarial parlance, advanced life-delayed annuity.
Invest $50,000 at age 60 in a variety of tax-efficient index funds, exchange-traded funds, and/or individual stocks.
Assuming 6% annual growth, you would have $215,000 at age 85. Here’s a comparison between the insurance policy, as described above, and your self- insurance plan.
Insurance Policy Self Insurance
You die just before age 85 $0 $215,000
Annual payments assuming
you live to 100 and are
female $34,000 $22,000
In effect, by self-insuring, you will probably give up some income in exchange for the ability to access or pass on principal. In the above scenario, if you die some time before age 100, your heirs will receive any unused money in your “self-insurance account.” On the other hand, if you live beyond 100, you’ve exhausted your account while the insurance policy keeps on paying.
Of course, the benefits are guaranteed with the insurance policy. There are no guarantees when investing on your own. For example, all the money may have to be used for expenses before age 85. Here’s a thought: If your betwixt and between on the real insurance and self-insurance routes, put away half the money you want to invest into each.
Smart Money Tips
A Pair of Tips to Take Advantage of a Depressed Market
- It’s a good time to make your 2022 IRA contribution. If you haven’t yet made your contribution for this year, take advantage of the recent travails in the stock and bond markets by making your contributions now rather than waiting until the last minute. Stock and bond prices are mostly lower, so you’ll be able to acquire more shares with the same amount of money compared with earlier this year. This is a form of dollar cost averaging which can be a big help in building up your investments over time.
- It’s a good time to deploy some of your idle cash. Has the pandemic and scary economy kept you from investing much new money over the past few years? If so, consider gradually adding idle money that is paying virtually no interest to take advantage of lower stock and bond prices. One way to do so is to review your individual investment holdings and identify funds that you like but which have been hammered so far this year. Put some of this idle money to work in these holdings. This is what contrarian investors do, usually to their benefit.
Food for Thought
Problems are only opportunities in work clothes.
–Henry J. Kaiser
Money Can Be Funny
Pond’s Laws of Lotteries
- Your chances of winning the lottery are less than the chance that you’ll be struck by lightning at the precise moment you’re being kidnapped by Martians.
- Anyone with a winning scratch ticket will use said winnings to purchase additional scratch tickets until such time as he or she is in possession of only losing tickets.
Word of the Week
sybarite (syb-a-RITE) noun – a person devoted to pleasure and luxury, a voluptuary
Origin: From the Greek Sybarites, meaning people from Sybaris, an ancient Greek city noted for the hedonism and luxurious habits of its inhabitants.
Ever the sybarite, Nancy treated herself to a day at the spa and a shopping spree, deriding the Spartans who forgo such luxury in exchange for a hefty 401(k) contribution.