Record low interest rates have dramatically changed the income and investment strategies for most people 70 and older, leaving them to ask, “How do I continue to receive the income I need and balance my concerns for safety?”
The good news is, you can have your cake (income) and eat it, too (safety) by utilizing two seemingly competing strategies:
The Immediate Annuity
Consider the advantages of purchasing a single premium immediate annuity (SPIA) with the “no certain” option.
You will receive a guaranteed payment each month for the rest of your life. You cannot outlive it! The payment is typically between seven percent for a person aged 70 up to 13 percent for a person aged 85.
People are surprised at how high the income is but remember, this is a return of your principal as well as interest. And, since most, if not all, of the income you receive is coming from the investment of your own money first, it is not subject to income tax.
However, when you die, the annuity is zeroed out (this is the “no certain” option) and no proceeds are distributed to your estate, but that’s a dilemma that is easily solved by …
Universal Life Insurance
Since the annuity will now be paying you a very high income relative to what you may have been earning, allocate part of that to purchasing a universal life policy. Now when you die, your beneficiaries will inherit the principal you invested to purchase your annuity tax free through the proceeds of your life policy.
As you can see by the “max plan” comparison adjacent, the advantages of simultaneously purchasing an annuity and a universal life insurance policy provide guaranteed income and guaranteed safety. In most cases you will realize a net return between 4.5% – 6.5% per year.
What’s more, there will be very little (if any) income tax due on your annuity income until all your principal has been paid back to you (see exclusion ratio). It is also possible to have the life insurance benefit pass to your beneficiaries free of income and estate taxes.
We always use two different insurance companies for the life insurance and annuity as we are really asking each to make opposite wagers. The life insurance provider is betting you will live past your life expectancy (and so will have funded your policy 100 percent) while the annuity provider is betting you will pass before you’ve used up your principal.
Generally a minimum investment of $100,000 is needed to make this worthwhile. You need to be insurable for the life insurance coverage.
So you see, you really can have your cake and eat it, too. As with any investment, consult your legal and tax professional for advice for how best to structure such a plan.