Questions from agents about selling life insurance and annuities in the senior market continue to amaze and disappoint.
"Senior market" here refers to true seniors–those over the age of 80.
The questions tend to fall into two categories. For life insurance, the story goes something like this: The agent says the customer "does not need" a certain sum of money. That sum is usually very accessible, such as a low-interest-bearing bank account.
Rather than allow that money to sit in the bank and accumulate interest that is taxable, the agent proposes taking the money and buying a single premium life insurance contract.
Even though the margins are not that great, depending upon the assumptions made, usually the agent can show that: 1) the money can be increased at death with a nice return; 2) meanwhile, the cash values will be accumulating tax-deferred; and 3) at death, the proceeds will be received free of income tax.
In addition, the agent may show that the single premium may be enough to purchase a guaranteed death benefit, without the need for any further premiums.
Let's look at this transaction more closely. When the agent says the customer "does not need this money"–or even if the customer says that–what does it really mean?
From the attorney's viewpoint, it means the agent thinks the customer does not need the money now to live on and presumably will never need it. So, the agent believes tying the money up in a single premium contract is justifiable, supposedly, even though the cash values initially are greatly reduced from what is available at the bank.
Moreover, we often see that the money that supposedly is not needed comprises a large percentage of the customer's assets. For instance, many seniors have learned to live on Social Security, their company pension and perhaps an IRA. That often leaves large sums of money tantalizingly sitting in those low-interest-bearing bank accounts.
The problem that we see with this approach is that at such an advanced age, a person's situation can change drastically at any time.
A disease, for example, that may not be fully covered by health insurance, particularly a treatment that may be considered experimental–and therefore not covered–can use up the nicest nest egg. At that point, the money in the single premium contract may, in fact, be very much needed.
Of course, then, unlike when the customer was younger and working, the customer lacks the flexibility to accommodate this sudden need. So, when the customer tells the agent that he or she does not need the money in the bank to live on, the customer may not be considering the worst-case scenario. But the customer's lawyer will probably see that scenario–and, I submit, so should the agent.
In any case, even if the customer fully appreciates the situation, the money tied up in the single premium contract should not be a significant portion of the customer's assets. What that means depends upon the individual situation, but certainly, more than 10% should bear close scrutiny.
