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Life Health > Life Insurance

When Advising Seniors: Approach Insurance As A Placeholder

By Robert P. Stone

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Anyone who has ever tiled a shower knows how useful those little spacers are. They serve as placeholders, securing a spot for the grout that will hold the tiles in place.

Certain insurance products can be used similarly.

Consider: Facing the future can be a daunting prospect, especially for seniors who are taking stock of their retirement situation. While these clients may not be ready to embrace an all-encompassing plan for their future, they may be open to using placeholders to allow them an incremental implementation of a strategy.

Industry experts have suggested the possibility of using annuities as a placeholder for retirement income. It is a topic that deserves further discussion. Absent a pension, a retiree must find a way to create income.

For the lucky few, this may mean tapping into inexhaustible wealth. For the rest of U.S. retirees, there’s a bit more stretching involved. Social Security benefits may provide a small floor income. After that, however, what’s the right plan?

One solution is to buy a large immediate annuity. Many people, however, are uncomfortable giving complete asset control to an insurance company in return for an income stream. Discomfort aside, is buying one income stream the best answer, anyway? Wouldn’t it be preferable to achieve a reasonable income over the long haul while simultaneously maintaining control over a portion of assets?

That’s where deferred annuities become an income placeholder for a senior. By laddering annuity products, eras of income can be created while permitting control of the remaining deferred assets and allowing maximum growth potential.

The idea is to set aside several chunks of retirement assets that don’t need to be used as income for long periods of time. Those funds can then be invested in longer-term, higher-yielding vehicles until they are needed. The longest-term portion might even be put to work in an indexed annuity or variable annuity with return of premium guarantee.

Placeholders can also be used to take a portion of retirement assets and purchase longevity insurance. This is an emerging type of insurance product. It is structured so that an income purchased today is deferred for a number of years (but without the cash surrender values provided by the deferred annuities to which the industry is accustomed). Then, later in life, the income payments start.

For instance, a 67-year-old retiree might purchase a life income–longevity insurance–of several thousand dollars per month, payable starting at age 85. Such insurance has true insurance risk in that it only pays if the insured event is triggered (in this case, the insured living to age 85).

It’s not hard to figure out that a life income for an 85-year-old is less expensive than a life income of the same amount for a 67-year-old. Combine the age-related price difference with the present value discount over the 18-year deferral period and the longevity insurance can be obtained for a bargain.

Given the number of years many retirees are expected to live, purchasing placeholder income starting at a later age may be just the right balance between controlling some assets today and having guaranteed income later.

Are annuities the only insurance placeholder? Not necessarily. Life insurance can also be used as a placeholder–a placeholder of future financial promises.

A secure retirement for senior clients is just as dependent on sure-footed life insurance planning as it is on solid income planning. Whether it is the untimely death of a parent or guardian (a role today’s seniors still fill) or the expected end of a long and fruitful life, life insurance contracts are placeholders for future lost income/support, payoff of debt, and future transfer of wealth.

Life insurance can even be a placeholder for more life insurance: an affordable term policy can hold the place of permanent life insurance, perhaps permitting conversion of the term policy to a whole life plan at a time when funds are freed to fund the permanent coverage.

Many seniors find it difficult to commit to bold strategies, especially when they seek retirement planning advice. But by using placeholders, the financial advisor can help ease a client into a more secure future. As an added benefit, the advisor may also gain a client for life.

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