Stick with me for a minute, and I’ll show you a way to “rig” your life insurance policy so you can pay less money for the same amount of coverage.
Recently, I was quoting a 50-year-old gentleman a $1,000,000, 20-year term policy through Banner Life Insurance for $2297 per year. My client admitted it was a fair price, but was on a tight budget, and asked if anything could be done to lower the premium.
Death Benefit Income Rider
In his case, something could be done. He had explained to me the reason he wanted $1 Million of coverage was he wanted enough to replace his income ($50,000 per year) for his wife for a period of 20 years.
Solution – “Fixed” Death Benefit Payments
You might be surprised to learn there are a handful of companies who allow you to designate a fixed payment for a fixed number of years as the policy’s death benefit, rather than a lump sum benefit. The quotes look like this:
|50 Year Old Male – 20 Year Term policy|
|$2297 Annually||$1,000,000 Lump Sum Death Benefit|
|$1694 Annually||$1,000,000 Death Benefit Paid over 20 Years|
And it saved him over $600 per year. I quoted him Protective’s 20-year term policy for $1694 per year. Rather than paying a lump sum upon his death, his wife will receive $50,000 per year for 20 years. So in the end, she still gets the same benefit, $1 million, but at a heavily reduced cost.
Which Companies Offer Income Protection?
It’s called an Income Protection Option or Death Benefit Income Rider. Transamerica and Protective both have some form of this “modified” death benefit option, as well as a handful of other companies.
This differs from the typical death benefit selection in that usually, the beneficiary who completes a death claim elects how he or she would like to receive the death benefit, whether as a lump sum, or annuity payments for X number of years.
But in the case of Protective’s fixed payment death benefit, the terms of the payment are decided by the policy owner upon the issue of the policy, which is irrevocable. The beneficiary has no say.
This type of fixed payout could be perfect for many scenarios.
If I want my spouse to have $100,000 per year of income for 30 years to replace the income I would have earned, it will cost be substantially less to pay for a policy with this exact payout than for a $3 million policy.
Alimony or Child Support
Many divorce decrees mandate a spouse to provide a certain dollar amount to an ex-spouse for X number of years. Life insurance is often used to provide a guarantee on these agreements.
Why not get life insurance that provides the exact amount needed for the exact time frame, rather than paying your ex-spouse a lump sum?
Perhaps those who will benefit from your life insurance policy are young, or you don’t trust them to prudently manage a large sum of cash. Pay them annually for a set period of years.
Transamerica’s benefit is a bit different than Protective’s. Transamerica actually forces you to take a minimum death benefit as a lump sum of $10,000. Then the annuity payments begin for a fixed period of years, and then there’s even the option for a back end lump sum to be paid out.
Protective has the front end lump sum option, but not the balloon payment at the end, and the other difference is Protective allows the initial lump sum to be zero.
I was quoting $500,000 for $970 per year. Instead, he got a quote from Protective for $300 cheaper per year, which would also pay out a $500K death benefit, but not a lump sum. Instead, it pays it out over a 25 year period.
Lowest Cost Life Insurance with “Modified” Death Benefit
If you structure the death benefit with the fixed payment plan, no other term policy can touch the price. Feel free to challenge me on this.
One issue to take special note of, however, is that a portion of these fixed payments may be taxable since the payments the beneficiary receive include an assumption of supposed annuity interest. (This is not tax advice. Speak to your tax advisor.)
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