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September 14, 2020

life and health insurance 2

The use of annuities is an acceptable form of estate planning, if they are used in the right circumstance. An annuity is a set number of payments for a set period of time. The term “annuitization” is the process. For example, when you retire you want to have a guaranteed stream of income for as long as you live. You can purchase an immediate annuity from and insurance company for the payments. The amount of monthly income is dependent on the purchase amount (say $100,000), the current interest rate environment (which is about 1%), your sex (women live longer than men), and where you fall on the mortality table (you retire at age 65, which means you will probably live another 20 years). You are betting that you will outlive that $100,000 investment while the insurance company is betting you will die before then.

Some employer-sponsored retirement plans (which we’ll discuss later in the semester) include fixed and variable annuities as their investments. These 403(b) plans act just like a 401(k) plan but are sold primarily by insurance agents, which is a benefit because the agent can provide you with investment advice (provided they have a SEC Series 6 and 7 securities license). The investments are essentially mutual funds “wrapped” into an annuity. The 403(b) also has a “death benefit” feature that guarantees the total amount of contributions paid over time will be paid at the policyholder’s death, no matter how the investments did. For example, say over the past 20 years you invested $60,000 into a 403(b) account but the account balance was $55,000; if you died at that time, your beneficiaries would receive $60,000. On the other hand, if the account balance was $100,000, your beneficiaries would receive the $100,000. Another feature of 403(b)’s, like 401(k) plans, is that earning grow tax-free; you pay the income taxes upon withdrawal. 403(b)’s are used by state and local municipalities, churches, and non-profits.

 

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