Using Impaired Risk SPIAs: Strategies For Unhealthy Clients
An “impaired risk” single premium immediate annuity (SPIA) is one financial product that may give a health-impaired client an advantage over a healthy counterpart.
Clients with serious medical conditions generally have fewer financial planning options than healthy clients. Health-impaired clients may not easily qualify for life, long term care, disability and health insurance. They also may not be able to use estate planning techniques effectively like grantor retained annuity trusts and charitable remainder trusts. Many agents feel they have little to offer such clients.
However, an impaired risk SPIA may provide the medically impaired client with a higher annuity income than a healthy client could receive from a regular SPIA. Here are some typical uses:
Increased Income. Many clients simply want more income from the premium they pay for a SPIA. Chart 1 gives an example of a 65-year-old male with a medical condition that gives him the life expectancy of a 71-year-old male. For a premium of $100,000, he receives annual payments from his impaired risk life-only SPIA of $9,756 for the rest of this life. A regular life-only SPIA would have produced lower annual payments of $8,212. The impaired risk annual distribution is almost 19% higher.
Pay Life or Long Term Care Insurance Premiums. A health-impaired client may have to pay higher premiums for a life or LTC insurance policy than a healthy individual would pay. The extra annual income from an “impaired risk” SPIA may effectively help the health-impaired insured pay the higher premiums created by a rating that may be associated with impaired health.
Asset Allocation Improvements. With a guaranteed income, most health-impaired clients may feel more comfortable to pursue a sound asset allocation strategy. For example, we have seen many clients with 80% or more in cash, cash equivalents or low yielding bonds because they are afraid of running out of money before they die. After purchasing an impaired risk SPIA with a guaranteed income, those clients have felt better about using a balanced asset allocation strategy.
Estate Planning Applications. Impaired risk SPIAs sometimes can be used to help implement the estate plans of wealthy but health-impaired clients. The following example is taken from an actual case closed by Michael.
Harry, age 75, and Wilma, age 72, have an $8 million estate with $1 million of their assets in a money market account. Although their primary goal is safety for this money market fund, they also want to maximize the amounts that their children and grandchildren will receive from these funds.
An impaired risk SPIA combined with life insurance in 2 irrevocable life insurance trusts (ILITs) has a strong appeal to Harry and Wilma. Harry has a health condition that permits him to qualify for an impaired risk SPIA. Although the SPIAs guaranteed income of $108,000 and the tax exclusion ratio are great benefits, Harry and Wilma want to replace the SPIA at Harrys death with another asset.