I got one of those terrible phone calls this past week that I had hoped I would never receive. Skip called to say that his dear wife Vivian had passed away suddenly. I met Skip and Vivian three years ago (I have changed their names to protect their privacy). At the time, he was 80 and she was 75. They had become uneasy about their finances and registered to attend one of my Estate Preservation seminars.
Skip & Vivian were wonderful people. They were enjoyable to talk to and engaging in their zest for life. I enjoyed our newfound friendship and looked forward to my meetings with them. On our first meeting I asked a range of questions seeking to learn about their financial life. As always, I looked at the whole financial chessboard for better understanding.
Their financial world was quite simple. They didn’t have any debt. Their liquid assets were just under $200,000. They had a combined income of $5,200 per month, which came from a range of sources including Social Security and a variety of pension checks.
Their main concern was the lack luster interest they were receiving on their savings accounts, which comprised the majority of their holdings. Since savings accounts are only paying a pinch better than they were three years ago, you can imagine their disgust. My notes reflect they were receiving only .05% in annual interest.
After some additional questions, I learned that Skip and Vivian had been married for only 15 years, so they had made their pension payout and irrevocable survivorship elections many months before they met. Since each had been single for some time with no thought of remarrying, each had elected “single life only” as their pension payouts. This provided the highest amount of guaranteed lifetime income, but yielded no survivorship benefits. It took some time to ferret out this information because neither Skip nor Vivian was aware of these details.
I find that most pre and post retirees do not think of survivorship risk, let alone execute a purposeful strategy to replace lost income from a spouse’s passing. It’s understandable that we don’t want to think of a loved one dying, but that doesn’t mean the risk will go away. Since it is common for Americans to live in retirement for 30 years, a surviving spouse could live 10 or 15 years past their companion. This can create economic hardship for those left behind.
Initially, both Skip and Vivian were anxious to fix their lethargic savings account. They wanted security and capital protection. They labeled the asset as long-term savings, having an adequate emergency fund and other money for travel and entertainment, etc… They did not want market risk and felt some sort of a deferred annuity was probably the best answer, but didn’t know how to proceed. Because I am focused on identifying and mitigating the largest retirement risks we face, I recommended a different approach.
They thought their biggest risk was inflation. In reality, the looming risk was the 30% loss of income Skip would experienced if Vivian died and the 40% loss of income Vivian would experience if Skip died. Remember, they were earning $5,200 per month so the loss of income due to a spouse passing was substantial. Once discussed, they recognized this as a far greater problem than the paltry .05% interest rate being earned on the savings account. Could a better strategy address both inflation and survivorship risk and even provide increased tax efficiency?
Since Skip wasn’t insurable due to a history of cancer and heart trouble, we placed a life insurance policy on Vivian making Skip the primary beneficiary. A single premium whole life insurance policy on Vivian was secured by repositioning $94,000 out of the savings account. No more premiums would be required. This generated an immediate death benefit of $131,000 and could grow in the future based on paid up additions. The cash value would grow as well and be accessible. Although dividends are not guaranteed, the policy was placed with a highly rated carrier whose dividend history included paying dividends every year since 1877. The dividends, although not guaranteed, were projected to exceed the rate of return on their current savings account by more than 50 times.
Fast-forward to last week when Skip called me with the terrible news that Vivian had passed away suddenly from colon cancer. I was shocked! She had been diagnosed just 2 weeks prior and had passed during some complications in surgery. We simply do not know when it’s our time! After consoling Skip on the phone, all of the aforementioned details of our estate preparation work came back to me. Although saddened, I was pleased knowing we had done the right job in protecting their income.
At a 3%-4% interest rate, how long would it have taken the $94,000 to grow to the now $133,620 death benefit? Answer: 10+ years, before taxes! Now, Skip will receive the $133,620 proceeds from the life insurance policy tax-free. This increased amount will help him replace the income lost from Vivian’s passing. At 83 years old, Skip could convert this asset to a single premium immediate income annuity paying a monthly $1,500 paycheck for life, effectively replacing the lost income. Of course, none of this can replace the loss of his dear companion, but it allows Skip to continue forward without the economic hardship that so many surviving spouses face when a loved one passes.
This is what effective preparation is all about! I remain saddened by Vivan’s passing, but encouraged by yet another effective strategy that has brought financial peace to another beloved client and friend.