Over time, life insurance products have evolved to meet the financial needs of consumers. For example, early basic term, whole life and annuity products have evolved into a myriad of products designed to meet specific client needs.
For today’s seniors, however, there is one critical and obvious financial need that has gone unresolved until now. Take a moment to step back and reflect on what this real need of every senior is. You could say it’s to save enough money to sustain the client and his spouse’s lifestyle for two lifetimes. For the surviving spouse, you could say it’s to have enough cash from life insurance proceeds to pay for the hierarchy of needs we learned about while attending our first LUTC classes. Those needs are cash for final expenses, business and personal loans, children’s education, the mortgage or rent, emergencies and monthly income for a lifetime.
The critical need
The most critical of these needs is the need for a guaranteed lifetime income. With it, all of the other needs can be resolved. There are really only three sources of lifetime income. They are self insurance (savings and investments), the U.S. Government (Social Security and Welfare) and life insurance (the death benefit). However, as my mentor used to say, “The only good insurance policy is the one that is in force on the date of death and whose death benefit is sufficient to fulfill the lifetime financial needs of the beneficiary.”
The reversionary annuity was designed to provide a guaranteed monthly income that cannot be outlived by the beneficiary.
What insurance plan fits this bill? Is it term? Term plans are not the guaranteed lifetime income solution for most people. Have you ever wondered how many term policies actually go to claim? An undocumented Pennsylvania State University study indicates that only 10 percent of all term plans survive the term period, and then only 1 percent of the total becomes a death claim. If this is true, a huge majority of term beneficiaries are left without coverage and are forced to self-insure their financial future.
Term plans may indeed be the product of choice for the beneficiary during the family years, when unallocated income is minimal and the financial needs are huge. But if seniors do not move to another product when the children are grown, their term product may provide the beneficiary with a false sense of financial security.
Permanent plans also offer little help to senior beneficiaries who need lifetime monthly income. Many have opted to use permanent plans as a shotgun approach to the need for coverage, first to provide for joint retirement via the increasing cash value, and second, to provide needed cash for the beneficiary should death occur. Because of their higher premium cost, however, permanent plans are not usually purchased with face amounts sufficient to support the lifetime income needs of a surviving beneficiary.
Many advisors have recognized this gap in the traditional insurance product design. They have questioned why no product directly addresses the question of a permanent, stable income that cannot be lost through poor investment decisions or other emergency situations.
A solution is indeed now available. It is called a reversionary annuity. Simplistic in its design, this life product becomes an annuity upon the death of the insured. Like term insurance, it has no cash value and its structure permits a high premium to benefit ratio. Its guaranteed monthly income benefit is contingent upon the beneficiary surviving the insured. Should the beneficiary die first, the policy terminates and the return of premium rider returns all paid premium to the insured.
Unique, but not for everyone
Of course, no one policy or plan can solve all client problems. However, because the reversionary annuity was designed to provide a guaranteed monthly income that cannot be outlived by the beneficiary, and at a lower cost than other forms of permanent insurance, it efficiently resolves many of the burdensome problems of the surviving senior. The reversionary annuity will close additional sales because it fits the senior client’s need.
For years we have been saying that we know how to sell on a need basis. But, sitting around the kitchen table with senior clients, we often fail to ask the question: “What do you really need your insurance for?” If the answer to that question is survivor income, then we should discuss alternatives besides the timeworn portfolio of whole life, universal life and term life insurance products. The reversionary annuity gives us the opportunity to return to the root of life insurance selling by providing a vehicle designed specifically to provide the living—the survivor—with a guaranteed, renewable resource upon which to live. The need for income is permanent and universal, and now there is an affordable solution.
Dean M. Potter has more than 30 years of experience in the insurance industry. He is president of Century Management Company, the national TPA for companies offering reversionary annuities. You may reach him at 888-810-0881.