Longevity and permanent insurance-a match made in heaven
We have all heard the phrase “outliving your retirement savings”. It seems to put a cloud over clients hoping for a long and healthy retirement. Unfortunately in a low interest rate environment increased lifespans are making it harder for our client’s to accumulate enough in savings to meet their future needs.
From a financial planning perspective we often segment our financial goals and associate certain products to meet specific goals. For example we think of investment products (GIC’s, mutual funds, segregated funds, etc.) to support our retirement income needs and we think of life insurance to provide capital at death to meet our estate planning needs. To help deal with longevity issues consider integrated solutions where one product may support multiple needs.
A case study:
Rob is 56, his wife Joan is 54, both are non-smokers. They have two children and have decided to set aside $15,000 a year for the next 10 years to create an estate benefit for them. They are conservative in nature but hope this planning will provide their children with a significant gift when they die. To show the clients how life insurance can increase the size of the gift at death, when compared to a taxable investment, we can show them an Estate Bond insurance concept illustration.
Manulife UL, Joint last-to-die - Level CIS with level COI for 10 years. Manulife UL interest rate assumption – 0.00%
Initial death benefit - $600,000 Assumed Life expectancy – Year 35
Taxable Investment – Interest bearing investment at 5.00%
Comparing the benefits
As you can see by the chart above, Manulife UL will substantially increase the size of gift when both Rob and Joan die. But what if they live beyond life expectancy and have a need for additional cash to meet their lifestyle needs? At that time they could access cash from their policy through the Insured Retirement Program (IRP). The IRP could provide them with an additional $46,000* for 5 years beyond their calculated life expectancy. If the last surviving spouse died at the end of year 40, the gift to the children would still be in excess of $330,000*.
Longevity risk is real but planning with permanent insurance can provide the flexibility to meet more than one financial planning goal and with limited risk to the client.
*IRP assumptions, Manulife UL Limited 10 Pay, $15,000 x 10 years, 0% rate of return, Loans from year 36 to 40, @ 5% Loan rate. Loan advance amounts are not guaranteed. Actual results will depend on prevailing loan interest rates when loans begin.
Date: Dec 2015