Obtaining life insurance for individuals with medical problems is not always simple. Underwriting can vary dramatically among carriers, creating a wide disparity in premium.
Of course, some life insurance companies may offer guaranteed issue life policies, which provide a much lower death benefit in the early years but at premiums that many clients consider too expensive for the budget.
Paying high premiums and receiving decreased death benefits need not be the norm or only solution, however. A reversionary annuity can be the solution for impaired risk as well as standard risk cases.
A reversionary annuity is a unique life insurance policy that offers a predefined lifetime income death benefit, rather than a lump sum death benefit as in traditional life policies. It is payable to the beneficiary upon death of the insured.
One distinctive aspect of this product is that the age and gender of the beneficiary can impact the premium, thereby permitting highly rated and sometimes severely medically impaired individuals to become insured. The older the beneficiary, the lower the premium. (See Chart 1.)
When it comes to impaired risks, a large concern for insurance companies is often the high probability of imminent death of the insured. As a result, many life insurance products will reduce the death benefit for an early claim. This is not the case with reversionary annuities.
Because the proceeds from a reversionary annuity are paid in the form of an income stream, the carrier is not exposed to a large cash outflow at one time–i.e., the time of death. Paying the death benefit over time permits the company to offer an attractive benefit, irrespective of when the insured dies.
In its basic form, the reversionary annuity provides no benefit if the beneficiary dies before the insured. However, there are several flexible options available with most reversionary annuities that make them attractive all the same. These include:
o A “return of premium” option. This pays out all premium deposits in the event the beneficiary does die before the insured.
o Limited pay scenarios. These enable the owner to have the policy paid up sooner.
o Minimum certain period for benefit payments. This ensures that payments will continue for a minimum period, even if the beneficiary dies soon after the insured.
o Inflation protection. This provides that the benefit to the beneficiary will increase annually (beginning either at policy issue or time of claim).
o Accelerated benefits. This option provides the beneficiary with a larger initial benefit payment immediately upon death of the insured, or accelerates the payments to the owner if the insured is diagnosed with a chronic or terminal illness.
o Reduced monthly benefit. This is triggered if the owner becomes unable/unwilling to pay the scheduled premium.
o Term insurance. If the premiums of the standard reversionary annuity are too high for the customer, the person can obtain a term version of the reversionary annuity at lower cost.
o A waiver of premium rider. This allows the policy to remain in force with no further premiums if the owner suffers some form of disability.
While guaranteed issue reversionary annuities do exist in today’s market, there are more reversionary annuity options available today if the impaired risk can qualify for life insurance. Naturally, the cost does vary with the health of the insured.
There is typically no cash surrender value provided within reversionary annuities. This helps keep the premiums low. (See premiums in Chart 2.)
Another factor to consider: according to a private letter ruling (PLR No. 9717033), most of each monthly death benefit payment received by the beneficiary will be treated as income tax free.
Comparing the death benefit of the reversionary annuity to a traditional life insurance policy depends upon the age of the beneficiary at the time of the insured’s death. If a beneficiary is younger, then the value of the monthly income is greater. (See Chart 3.)
Individuals with medical problems who are seeking life insurance will want to consider a reversionary annuity. The guaranteed death benefit, along with the tremendous flexibility, is an appealing choice.