What about life insurance vs. retirement-income plans? "Gearing up the old retirement plan to meet inflation is the big news," says a top independent insurance consultant in London. You don't necessarily need more life coverage - in fact, you could be overinsured. But updating coverage in line with some new policies on the market makes sense. At the same time, you might sidestep a pitfall or two.
There is the "variable annuity" to consider. The new type of retirement plan that pays out a variable amount of income each month - depending on the performance of a common-stock portfolio - gives you three choices:
Combination life insurance and mutual fund packages. Variable annuities with payouts depending on investment yield (see below).
Combination fixed-income and variable-income annuity plans.
A few small companies pioneered in selling mutual funds. Now you'll find such big names as Connecticut General, John Hancock, New England Mutual, Occidental, Prudential, and Travelers in the common-stock mutual fund business.
Here you get convenience and flexibility plus the feeling that you're dealing with a company you may have known for years. The idea, generally, is that you buy the fund shares and your life insurance from the same salesman and - as for the fund shares you can quit buying them or liquidate whenever you choose.
If you continue to buy the fund shares up to age 65, you then begin to get a retirement income that depends on their market value at the time. But note: There's no special guarantee tied to the mutual fund part of the package you can outlive the retirement income. The insurance coverage works just as with any ordinary life policy. These package plans have advantages, but the pound performance of insurance-company common stock funds is untested over a span of years. You would be wise to check on this, though - as far as possible.
A variable annuity, guaranteeing you a varying retirement income for as long as you or your wife live, binds you to a fixed contract. You pay so much a year until retirement, with the payments invested in a common stock portfolio. The basic idea, of course, is to ride up with inflation, year to year. But there's this drawback: It's usually a front-end load. If you cancel the deal in its early years, you pay a penalty.
Companies in this expanding field now include many of the big-name insurance companies. If you want to mix a fixed retirement income (the old standby) with a pure variable contract "you might look at some new combinations being sold by Aetna Life and New England Mutual, among others. Here the portfolios are 50-50 common stocks and bonds-mortgages, so you have a floor if the stock market goes down - and still room to ride up.
Another new insurance "trend" has been sparked by Internal Revenue. Say you buy a life insurance policy and give complete ownership of it to your wife. Fine - the gift, if it has no strings attached, takes the policy payoff out of your taxable estate. But IRS has a string. If you continue to pay the premiums, part of the payoff - in some cases all of it - will be deemed subject to estate tax.
But there are at least two ways out:
1. Have your wife pay the premiums.
2. Have your premiums paid in advance so that you're four years ahead (see our pages on "Estate Planning").
A new development is that you can now "assign" ownership in a policy to a family member even if the policy is within your company's group life insurance plan.
While checking over your life coverage, note these additional points:
school financing: It may be smart to use a retirement-income plan that will have ample cash value by the time your youngster reaches school age. You then borrow on the policy (at 5%). It's worth investigating variations on the school-insurance tie-in.
Juvenile policies: The idea here is that the low premium cost to a child continues after he becomes an adult. For example, you can get a policy on a boy age 14 for about £125 a year, giving him £12,500 permanent coverage at the same premium. Get a pay or clause waiving premiums should you die.
Homeownership: Here you use decreasing term insurance covering the duration of your house mortgage. A man age 45 with a £30,000 mortgage on a £60,000 house, 20-year term, pays about £200 a year for this type of protection.
Guaranteed insurability: You attach this clause to your straight life policy (£2 per £1,000 per year). It insures you future coverage in bigger amounts - even if your health fails.
Life, Health, Casualty
The insurance business is loaded with high-pressure salesmen (sometimes poorly trained), hundreds of competing companies that sell a confusing array of policies that seem to shoot off in all directions at once - and hokum in a public press that's too frequently afraid to rock the boat. But nevertheless you need insurance! You must buy it! Here are some tips.
Take a look at your life insurance
First look at your life insurance policies. A review may be in order. You might improve your present coverage by taking advantage of new features available (maybe at little or no extra cost). You can also make certain that your basic strategy is up to date,... see: Insurance