Unique One: Mom's Retirement Life Insurance

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workingonit
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Joined: Fri Mar 31, 2017 11:22 am

Unique One: Mom's Retirement Life Insurance

Post by workingonit » Sat Jan 12, 2019 6:47 pm

Hi,

I have a weird situation I could use some advice on.

My mom (67) and her sister (71) split my deceased grandfather's state pension, worth about $80,000 per year ($40K each), adjusted each year for inflation. Her social security and investment income totals $23,000 so the pension is about 2/3 of her retirement income. The pension stops when her sister dies so she has a term life insurance policy on her sister that expires this year. Her sister living to 90 is not inconceivable based on various factors (fine health for her age, college educated, non-smoker, no diabetes, etc).

The principal of her current investments are $300,000 (see previous post for details) and represents only 7-8 years of equivalent income if drawn down at $40K/yr but represents $500,000+ in 15-20 years if left intact.

I'm thinking through two options:

1. Renew the term life insurance policy for 10-20 years. $500,000 for 15 years is $5,000-$7,500/yr depending on whether it's "preferred" or "standard". There is a big jump in price to 20 years and only 1 company _might_ offer it (for obvious reasons). Not to be crude but the best financial situation is that her sister dies on day 2 of the policy; the worst is she doesn't die and my mom is out $75,000-$112,500 (but presumably is happier because her sister is still alive).

A subplot of this option is that conceptually I (or I and my sister) could reimburse her for 20-100% of the policy price on speculation that if my aunt does die I (or we) get additional inheritance if any remains when my mom dies but we're out of the money if she doesn't. A bit uncouth perhaps?

2. Invest the equivalent life insurance policy money. Investing $5,000-$7,500 per year for 15 years at 5% nets $118,000-177,000 in capital. The worst case scenario is that her sister dies the day after the old policy expires and the pension income is lost. The best case scenario is that her sister lives past the equivalent 15 year term and the capital grows so when combined with her current investments she has enough to live out her life. Under the worst case scenario here I could conceivably support my mom as the backstop but it's obviously not my first choice.

Are there any other options to consider?
How do I think through the costs and benefits and actuarial risks of the situation and the two options?
Other thoughts?

Thanks.

123
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Re: Unique One: Mom's Retirement Life Insurance

Post by 123 » Sat Jan 12, 2019 8:41 pm

workingonit wrote:
Sat Jan 12, 2019 6:47 pm
Hi,

I have a weird situation I could use some advice on...
+1 Yes, you certainly do. A real head-scratcher.

Does the sister's share of the pension remain at 50% if your mom passes away first? (Does it go up?)

What are you mom's expenses? What would her situation be if she no longer received 50% of the inherited pension? Maybe you don't have to really do anything?

Certainly an unusual situation where life insurance seems to be appropriate and extending it may be reasonable but the expense/benefit of extending it seems almost macabre. I'm sure your mother's situation is not unique but I just haven't heard or thought of a similar situation.
The closest helping hand is at the end of your own arm.

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celia
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Re: Unique One: Mom's Retirement Life Insurance

Post by celia » Sat Jan 12, 2019 10:38 pm

Please consider this post as a thought exercise since I’ve never considered a situation like this. I am just thinking typing :) out loud and don’t know where this will take me, but maybe something I say will spark an idea for someone else to expound on.

Since your mom and her sister are relatively close in age, either one could die first. But you are only concerned about what would happen if the sister died first, since the pension would stop.

1) Life Insurance:
$7,500 per year / 40,000 per year (for 10-15 years) means she is giving up 19% of her pension each year.

2) Invest: $7,500 per year --> $118,000-177,000 (after 15 years)

In both of the cases you presented, your mom lives off:
$23,000 + $40,000 - $7,500 = $55,500 each year.

3) Apparently she can already live on that since she currently is (ie, current life insurance will expire this year) except that the premium for the last 10 years (let’s assume) was less. If she had tightened her budget and lived off half of the pension instead and saved half, she would have had more in investments. Let’s say she starts doing that now ($23,000 + $20,000) and saves $20,000. In 5 years she will have saved another $100,000 (and that's not even considering growth).

But the worst situation here (I’m glad you’ve been considering this all along), is if her sister dies one month after the old insurance stops. So you can bridge this scenario by buying less life insurance and for a shorter time, say 5 years for $200,000. I haven’t looked up any real premiums, but based on the $7,500 quote you have now, the premium should be less than $2,000 per year. So she would only be investing $18,000 per year for 5 years, at which time her added savings would be almost $100,000. If we double the insurance for 5 years and $400,000 of coverage, her additional savings would be a little under $200,000 since she was only saving $16,000 per month. (None of this math was run through any kind of calculator but the point is she could live off less while doing a combination of life insurance and savings.) Could she do this? It would be tight for 5 years, but after she has $500,000 in savings, she can give herself a COLA increase (or start with one now knowing it will take maybe 6 months longer to get to $500,000).

It would be good to get away from the insurance “crutch” since it will only get more expensive as time goes on.

Fixed annuities may also be an idea, but I’m not experienced with them.

MrsBDG
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Re: Unique One: Mom's Retirement Life Insurance

Post by MrsBDG » Sat Jan 12, 2019 10:40 pm

I don't see a female 70/71 policy for the amounts you mentioned, but I do see Transamerica has a 20 year term. You can also ask your agent to check the "level to" plans (level to age 85-90-95-100) and see which is best for her personal profile.

JoeRetire
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Re: Unique One: Mom's Retirement Life Insurance

Post by JoeRetire » Sun Jan 13, 2019 8:17 am

workingonit wrote:
Sat Jan 12, 2019 6:47 pm
My mom (67) and her sister (71) split my deceased grandfather's state pension, worth about $80,000 per year ($40K each), adjusted each year for inflation.
Your grandfather had a pension that his non-dependent children are collecting after his death?

Is that something that happens often in your state? I've never heard of such a thing.
Last edited by JoeRetire on Sun Jan 13, 2019 8:27 am, edited 1 time in total.

bob60014
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Re: Unique One: Mom's Retirement Life Insurance

Post by bob60014 » Sun Jan 13, 2019 8:25 am

JoeRetire wrote:
Sun Jan 13, 2019 8:17 am
workingonit wrote:
Sat Jan 12, 2019 6:47 pm
My mom (67) and her sister (71) split my deceased grandfather's state pension, worth about $80,000 per year ($40K each), adjusted each year for inflation.
Your grandfather had a pension that his children are collecting after his death?

Is that something that happens often in your state? I've never heard of such a thing.
This is really the "UNIQUE" part of the situation, imho! I've never heard of it either and would like to know more.

JoeRetire
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Re: Unique One: Mom's Retirement Life Insurance

Post by JoeRetire » Sun Jan 13, 2019 8:29 am

bob60014 wrote:
Sun Jan 13, 2019 8:25 am
JoeRetire wrote:
Sun Jan 13, 2019 8:17 am
workingonit wrote:
Sat Jan 12, 2019 6:47 pm
My mom (67) and her sister (71) split my deceased grandfather's state pension, worth about $80,000 per year ($40K each), adjusted each year for inflation.
Your grandfather had a pension that his non-dependent children are collecting after his death?

Is that something that happens often in your state? I've never heard of such a thing.
This is really the "UNIQUE" part of the situation, imho! I've never heard of it either and would like to know more.
I've heard of pensions with survivor benefits for spouses and sometimes dependent children. But not adult children.
Maybe it's a "state pension thing"?

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Watty
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Re: Unique One: Mom's Retirement Life Insurance

Post by Watty » Sun Jan 13, 2019 8:49 am

workingonit wrote:
Sat Jan 12, 2019 6:47 pm
Are there any other options to consider?
I don't know much about them and it could be a terrible option but there are companies that will buy annuities and future income streams(like from a lawsuit settlement) for a lump sum.

I would suspect that the amount they pay is pretty bad and would not make sense unless you are desperate for money.

They might be able to sell the pension and invest the lump sum.

Topic Author
workingonit
Posts: 17
Joined: Fri Mar 31, 2017 11:22 am

Re: Unique One: Mom's Retirement Life Insurance

Post by workingonit » Sun Jan 13, 2019 5:11 pm

Thanks for everyone's thoughts so far.

Re: Unique
It is a state pension. My grandmother died before my grandfather and some legacy provision gave it to the oldest child until they died. He wanted them to split the pension and they have for a number of years though my mom is responsible for insuring her sister for her half. If my mom dies first, her sister gets the full amount thereafter. The current term insurance policy is $1250/yr so $5,000-7,500 is a big jump.

Re: Budget
My mom's ability to reduce her expenses isn't great without sacrificing her quality of life or having to go back to work. I've gone over her budget with her (created a spreadsheet she uses) and don't see much wiggle room without reducing things she'd rather not unless it was an emergency - $23,000/yr isn't much if the pension went away. She wants to enjoy retirement a bit. We've only just started drawing the $12,000/yr from her investments and that was going to give her a cushion for trips, big expenses, emergencies, etc. but this eats a good portion of that. It's not the end of the world, but looking for more optimal ideas.

I like the idea of using a 5-10 year insurance length to bridge the investment gap - kind of a hybrid of the two concepts.

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