Within the past few weeks West Coast Life and Protective Life have announced a new term insurance product that, well, may be OK for some purposes. There are definite upsides, but a few downsides from where I stand.
The product’s main feature is that it doesn’t (DOES NOT) offer a lump sum death benefit. It claims to be playing to the 60% or so of people who claim that their primary reason for buying life insurance is income replacement, so rather than providing a lump sum, the policy provides an annuitized income stream. For example sake, if a person took out a $500,000 policy and passed away, rather than sending a check to the widow for $500,000, depending on the widow’s age, they might start sending checks for $480 per month for the rest of her life.
The upside to this idea is price. Protective Life claims that the rates will be 7% to 40% lower than their regular term rates. Kind of funny timing since they just increased their regular term rates. So, in reality, this new product is probably costing about what their regular term insurance cost was last month.
The downside is certainly worth noting. While the intent of most life insurance is income replacement, the reality of the need at the time of an untimely death is often a different picture. There are often expenses, large expenses, that need to be dealt with. Final medical expenses would be a good example. Anyone who has enjoyed a stay in a hospital recently knows that a week can cost $50,000 to $100,000 pretty easily.
Keep in mind that annuitizing money generally doesn’t produce anything near the income stream that you would think since the company is usually offering an income for life. The problem with an annuity is that the younger you are the less income an amount of money will buy. I’ll use a few examples and please don’t beat me up. They aren’t based on actual calculations but are just attempts to frame the situation. Let’s say your income is $75,000 a year and you buy $1,000,000 of 30 year term for income protection. If you die at your wife’s age 40, that insurance might produce an income stream of maybe $2000 a month, $24,000 a year. That’s not going to work. Will the income even cover a mortgage? Will you have to buy 3 times as much insurance to make sure the income is really replaced?
If you passed away at her age 65, that same $1,000,000 might produce an income of $5000 a month. See the problem, and again, forgive the inaccuracy of the figures, is that when income replacement needs are highest, the amount of income generated is lowest.
Bottom line. While I haven’t seen all the details of the policy, my gut says don’t jump on this just because the price seems lower. When I get more specifics and actual income replacement illustrations, I’ll pass them along.
How are they lowering the rates?
Are they lowering the rates by purchasing a life annuity with a really favorable interest spread for the company?
The lowered rates are based on the fact that Protective Life is not bound to pay a lump sum death benefit on those policies. That idea has been floated for some time as one way to lower rates. The other idea still hanging out there is a non convertible term policy.
I found some marketing materials. It looks like they aren’t paying an annuity. The customer chooses the income amount and duration at issue. So your $500,000 death benefit is really 10 annual payments of $50,000 not a $500,000 annuity. They are pulling the old lottery scam.
So, whether they choose to spread the death benefit over a beneficiary’s life or a 10 year period, the bottom line is that it takes away the flexibility to meet needs as they may actually exist.