Impaired Risk Immediate Annuities
What is an impaired risk immediate annuity? This is an immediate annuity with above average payout for life annuitization…due to client having a shorter life span due to bad health. The higher than normal payout is given to a client after a physician & underwriter determine the life expectancy for the client is below average, based age & medical condition of the client. Since the life expectancy of the client is shorter (due to bad health)…the payout for life annuitization is higher than a client purchasing standard immediate annuity with life annuitization payout (with no medical conditions).
Basically, the older you are with bad health…the higher your payout. Example; A 65 year male with bad health , invests $100,000 in a impaired risk immediate annuity and gets a payout of $904 per month, while a standard immediate annuity for life annuitization might yields $800 per month for the same client.
Even though impaired risk immediate annuities have been around for 20 years, the insurance companies do not have enough data to generate accurate actuarial data, so the underwriters have to guess the probable life span of the client. And since each insurance company is guessing on the life span of the client…each insurance company will come up with different payout amounts for life annuitization (on impaired risk immediate annuities).
The use of impaired risk immediate annuities, in financial planning has taken two directions. The most common use is the purchase of impaired risk immediate annuities to fund a life insurance policy.
The use of purchasing an impaired risk immediate annuity to fund a life insurance policy is not in the best interest of the client. Let’s examine this point further. The client (age 79) has $1,000,000 in taxable CD’s (earning 5% taxable), the portfolio generates $32,500 net per year (which is used for monthly expenses), and there is an estimated estate tax of 50%...so his estate would only get $500,000. But, if the client bought an impaired risk annuity earning $80,000 a year, and gifts $50,000 to ILIT each year to fund a life insurance policy, the client will get $30,000 (net) a year in income, and at his death, his estate will get $1,000,000 tax free. What’s wrong with this solution? The balance of $1,000,000 investment in the impaired risk immediate annuity…is now owned by the insurance company (since the insurance company only has to pay-out until the death of the annuitant). If client had invested in a non-recovery planning solution, using two deferred annuities (earning 5%), and the client could have received $81,801 (gross) per year, and gifted $50,000 a year to ILIT to fund a $1,000,000 death benefit, netting $31,801 per year in income. And let’s say the client died when he was 97 years old. The estate would get $414,851 (the taxable balance) from the deferred annuities, plus receive $1,000,000 tax free from the life insurance policy. Which would you want?
Whether you are talking about standard immediate annuities, or risk impaired immediate annuities (life annuitization)…they are both bad for the client (unless they're in a recovery solution). You're only leaping from a 1.5% (for a standard immediate annuity) internal rate of return to a 3% (risk impaired immediate annuity) rate of return...only because the insurance company thinks your'e going to die soon, and they can leagally steal your money from your beneficiaries. Who in their right mind would want a 3% (risk impaired immediate annuity) rate of return when they can get 5% (for a deferred annuity - with no legal hitches)?
Sincerely,
John Bagwell
The Truth About Financial Products.com – Blog
www.thetruthaboutfinancialproducts.com
