Q. In 1995, when my husband was 60, we took out a $100,000 insurance policy on him prior to his early retirement. We did this so he could take the higher single life pension rather than the lower joint life pension. There is a 12-year age difference between us. We've made monthly payments since then of $225. The policy accrued value was frozen at $117,158. Then I read this on our last statement:
"With future premiums, and assuming the current (policy) interest rates and risk charges will continue, your policy will remain in-force through 06/07/2023. With future premiums, and assuming guaranteed interest rates and risk charges, your policy would remain in-force through 07/07/2018."
I recently called my agent and was instructed to call the company directly. I was then told that the only way to keep the policy in effect beyond 2018 or 2023 is to increase our payment considerably. When I asked if the policy could be converted, I was told to contact my agent, who again said I would have to talk with the company! ?Could you tell me what we should do to protect the nearly $34,000 investment we've already made and to keep the policy from lapsing? —S.F., by email from Texas
A. What you have is called a "pension maximization plan." They are frequently offered by life insurance sales people as a clever way to take the highest possible monthly pension benefit (the benefit for a single life) so you can have more income while protecting the surviving spouse with a life policy. It's an intriguing idea except that I've never seen a set of numbers that actually works, particularly when taxes are considered. Worse, if the yield on your policy declines after it is written, the policy may end up cash short.
That's what has happened to you and your husband. The only way this policy will do what it was originally intended to do is if your husband dies before 7/2018, later if interest rates don't continue to decline. And while that may have him pushing 83 years of age, it may not be what either of you had in mind when you bought the policy.
While much of your investment is simply gone, you might consider asking the insurance company how much fully paid up insurance you could buy with the current cash value of the policy. It will be less than $100,000, but it will at least give you a known death benefit. With a paid up policy and a fixed death benefit, you'll then be able to buy a larger life annuity replacement income with each passing year.
Q. We are 83 and 88. We have about $830,000 in CD's and money market funds that pay us next to nothing. We have a $700,000 home with no mortgage and no other major debts. I have a small private pension. My wife and I have Social Security benefits. Between my pension and SS we are able to live O.K. We have four children and several grandchildren. Is it worth it to put most of our savings in a balanced index fund such as Vanguard VBIAX? We are healthy enough to stay in our home right now, however, ailments are starting to limit what we can do around the house. —C.M. by email from California
A. At your ages it is a good idea to have some zero-risk liquidity ready at hand in addition to your investments. You could, for instance, keep a cash reserve (earning next to nothing) equal to the estimated cost of one or two years in assisted-living or a nursing home as a safety measure.
In California the costs for both are higher than the national averages, about $42,000 for an assisted-living facility and $91,000 for a private room in nursing care. The purpose of keeping this reserve is to provide cash when you need it and not add the anxiety of having to sell investments willy-nilly.
A year of reserve will allow whoever is managing the money to make changes at a rational pace. The same reserve can also be used to pay for home health aides for some period of time, if your ailments make living at home hard but not so difficult that you need to move to an assisted-living facility. Having a reserve large enough to cover most contingencies, with the remainder invested in the fund you suggest, will help you strike a good balance between your personal needs and your bequest hopes.