By Barry Higgins

Salt Lake City

“One of the problems seniors have is the fear of running out of money,” says John W Homer, president Oxford Financial Group, Salt Lake City. “People are concerned about becoming dependent on their children.”

In his session at the National Association of Insurance and Financial Advisors annual conference here last month, Homer discussed some of the issues seniors are facing, and reviewed a sales concept with which he has had success.

“This is for people who need more cash flow and want to avoid estate taxes,” says Homer. “But, this concept is very focused on a specific market–were talking about people generally between the ages of 70 and 90.”

People in this age group, “live on income or interest off their savings or investments, but they usually do not invade the principal,” says Homer.

The basic premise of the sales concept involves reallocating a portion of a seniors fixed income portfolio into a single premium immediate annuity. “Were working with liquid assets as opposed to real estate,” says Homer.

It is possible to increase a seniors income with an SPIA, and then replace the principal used to purchase the annuity at the time of death through the use of life insurance, says Homer.

However, there are some precautionary steps producers need to take when working with this concept. The IRS has been critical of combining a SPIA with the purchase of a life insurance policy. Homer says that if agents dont take the necessary precautions, the death benefit may be taxable as ordinary income, as well as included in the insureds estateregardless of who owns the policy.

Agents need to be extremely careful, so as not to trigger this treatment of the life insurance proceeds, says Homer. (See sidebar.)

But, once these precautions are taken, seniors can benefit greatly from this plan, he says.

The first step in building this plan, according to Homer, is to apply for life insurance. Since the purchase of the life insurance and the purchase of the annuity are two separate transactions, Homer says it is prudent to apply for the life insurance first.

Once the life insurance policy is issued, and the first premium is paid, the plan can be completed with the purchase of the SPIA, says Homer.

Liquid assets are used to pay for the annuity, he says, and this creates a guaranteed income for life. Upon using the annuity proceeds to pay the future life insurance premiums, there is substantially more income left for the senior than would otherwise been available, Homer says, explaining that this is due to the age of his client. And this, he adds, is why the plan will only work in the senior market.

Upon death, the principal that was used to purchase the annuity disappears, says Homer. This is a characteristic of the SPIA with a lifetime payout. But, he says, heirs will receive the death benefit of the life insurance policy, thus replacing the original principal lost in the annuity.

Homer notes that if the policy were in an irrevocable life insurance trust, it would not be considered part of the estate. Since the annuity disappears at death, the initial principal used to buy the SPIA is instantly removed from the estate, says Homer.

“One of my clients sons came to me and said that the day his mother started receiving the monthly income from the annuity is the day she stopped talking to them about income,” says Homer. “It was a peace of mind issue.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, October 8, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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