David H. Kinder, RFC®, ChFC, CLU
David, can I do tax-exempt retirement strategies... even if I'm uninsurable?
Updated: Jan 20
This is a question I often get from people who have worked with agents in the past, talked to them about their medical history, and accepted what they said as "gospel fact". First, are we sure we're uninsurable? I use a service called "Virtual Underwriter" that helps me ascertain risks based on additional questions. Granted, this is not a medical exam, but it should give me additional insight into your medical history. (Remember, never lie to the insurance company because if death were to occur, the claim may be completely denied.) Second, I consult multiple company's medical underwriting guides to get a "pulse" on how it could be underwritten. (Pun fully intended!) So just because you may have been declined for insurance coverage in the past, does NOT mean you are forever uninsurable! Depending on how healthy you are (and the medical records substantiating that), we can still get a favorable offer! Third, standard is standard for a reason. I don't know why an agent would ever try to quote "preferred", "ultra", "supreme", or anything other than standard. It sets up the underwriting for a "bait and switch". Now, I may quote above standard IF there's nothing else that should be showing up and your height and weight warrant it. I'd also say, "As long as you look as good on the inside as you do on the outside, you may qualify for preferred. If that's the case, this is what it can look like."
But let's suppose that, after going through ALL of this... you are still declined (despite our best efforts). Can we still do tax-exempt retirement income?
YES!!! Should we? Well, you'll have to gauge your own longevity. If you believe you're only going to live another 5 years... it may not be feasible. If you believe you could live another 20 years... despite medical underwriting... then it can still make a lot of sense.
How? We can do tax-exempt retirement income using Non-Qualified Single Premium Immediate Annuities or SPIAs. What is a Non-Qualified SPIA? A SPIA is when we give a lump sum to the insurance company... and they pay you an income stream for the rest of your life. Payouts are based on your age. The older one is, the higher the income payment.
What if we die 3 years into the SPIA program? If it was set up for 'life only' (the highest possible payout mode), the insurance company keeps the balance. However, we can (and would recommend) that we design it to have a "period certain" to ensure that the amount of income we wanted to be paid out... IS paid out. And the remaining amount would be paid to the beneficiary of your choice - usually your spouse. The reason for Non-Qualified SPIAs is because they are largely tax-exempt income. There is something called an Exclusion Ratio. In short, there's always a portion of the payment that is taxable. However, in my own analysis, it has never been more than 15% of the annual payment. Much of the time, it was 10% or less. So, if you're getting $10,000 out of a NQ SPIA, no more than $1,500 would be considered taxable. How should we convert 'forever taxable' money into 'never taxable' (or largely never taxable) money? While every situation is going to be different - based on assets, ages, family situation, etc., I prefer to "dollar cost average" into the mortality tables every year. Instead of putting all your money into a NQ SPIA at once... why not do it over a period of 10 years? A plan like this requires professional coordination to determine any taxable liabilities owed on annual distributions, needs for current income, and any amounts set aside for future income... but it's a powerful combination! Which is 'better'? Life insurance or annuities? The income stream created from NQ SPIAs and a well coordinated plan CAN be very good and for income alone, can compete very favorably to a well coordinated life insurance retirement strategy. 1) Annuities do withdrawals rather than loans. That's why a portion will always be taxable. Plus, it will hinder the compounding of your growth of all your remaining money. The best way to get the best gains... will be to live a long time. 2) Annuities may not have favorable death benefits to pass on to your beneficiaries (other than spouse). So there are limitations... but if you truly are uninsurable, it's far better than no plan at all and you can still have a largely tax-exempt retirement income plan.