! A Pseudo-Life Annuity: Guaranteed Annual Income for 35 Years
Robert Muksian is a professor of mathematics at Bryant University in Smithfield, Rhode Island.


David Wilson from MD posted over 5 years ago:

I have an alternative that is a fraction of the complexity and is more predictable, conservative,stable, offers a higher return, flexibility, and protection on many levels.
It is a whole life policy purposely structured for high cash value and retirement income. My plan, started atage 48, with a 1035 exchange of $54k and 8k annual premiums. It will provide in 20 yrs $378k of tax free cash with an annual dividend of $7500 and rising each year. Had I known and understood the power of this plan and started this 20 yrs ago, my premiums would have been halved, and the cash would easily be over $1 million with a death benefit twice that!
One of the biggest benefits is the loan provision which provides for a "net zero" loan. I can borrow (4.7%) against the policy, not from it. Meaning, I am being paid interest and dividends on cash balance while money is loaned out essentially borrowing for free or even creating arbitrage situation. In fact, money is currently loaned out and utilized as downpayments on rental property which provides significant deductions and subsequent tax return to....pay annual premium!

Ronald from ME posted over 5 years ago:

Your higher return and other features comes at the cost of increased risk, so may not be suitable for more risk-averse investors. Insurance companies have gone bankrupt, and defaulted on their obligations in the past. Countries have also gone bankrupt, but most likely the risk of a US default on treasury obligations is less than the risk of an insurance company default.

David from MD posted over 5 years ago:

I will agree with you Ron that there are in fact no absolutes nor is there a "perfect" investment.
My personal opinion is that the chance of my insurance company going bankrupt and defaulting on its obligations to policy holders is much less the risk incurred in a portfolio of bonds whose performance and solvency going forward in this current debt laden global economy is a risky and volatile proposition at best.
You do understand that states have in place pools of money to back up insurance companies in case of failure in order to protect policy holders.
Interesting tidbit from last market collapse. AIG, one of the biggest financial services companies in the world when it failed. It was the non insurance side of the business that failed. The solvency of the pure insurance side of the business was in tact.
I appreciate your thoughts Ron but will gladly take my chances here.

Craig from VA posted over 5 years ago:

I am not sure the risk of forfeiture is the biggest concern. Using a life insurance policy as a distribution vehicle can be tax-efficient. However, the projected distributions you list are probably supported by dividends, which are not guaranteed. Life insurance ledgers project the current year's interest rate indefinitely into the future. Dividend crediting rates have been declining due to the low interest rate environment. How would whole life policy perform if dividends were credited below the current interest rate? This type of sensitivity analysis might help quantify the risk in the contract. To check the sensitivity of distributions, it might be important to understand how the distributions would be impacted if dividends were reduced by 50 or 100 basis points.

David from MD posted over 5 years ago:

I agree with you Craig 100%. As I stated there are no absolutes and no perfect investment. But, with ALL things considered, I feel, personal opinion, that it is the most efficient use of dollars for the basis of a retirement plan. Now, would I recommend, or do I suggest this being the end all to retirement/financial planning? No, of course not but it is the foundation, for me!
I appreciate you thoughts!

James from MA posted over 5 years ago:

Maybe this approach is too complicated for me but - can someone explain how the $920,304 total cost in Table 2 is derived? Thanks j

Barry from KS posted over 5 years ago:

Anyone notice that the 2027 price is out of line?

Binoy from CA posted over 5 years ago:

The math seems wrong.
At the given rates and with an outlay of $1 million, one cannot buy 30 years (let alone 35 years) of bonds that give off $40,000 income per year for the duration of 30 or 35 years.
One needs $999,183 to purchase just 25 years of bonds that mature each year to give income of $40,000 per year as spendable income.

...I used $60.1 as the purchase price for maturity year 2027 which is also wrongly given as $25 in thee table.

Daniel from PA posted over 5 years ago:

The prices I am finding are not even close. Have they changed that much in three months or is there a much cheaper source than TDAmeritrade?

Robert (Author) from RI posted over 5 years ago:

Responses to:
David from Maryland.
I cannot make a meaningful response since I don’t know the exact particulars of your whole life policy. By definition, one cannot outlive a whole life insurance policy, but it begs some questions. Will you need to pay the 8K premium for life? If so, the $7500 dividend is wiped out. If not, the premium will be extracted from the cash value, thereby reducing the base for future dividends. As you project now, the dividend is about 1.98% of the 378K projected cash value. Your use of loans against the cash value may create a nice arbitrage, but if not repaid, with interest, at your death, the death benefit will be reduced by the outstanding balance. If your rental properties are still mortgaged, will that death benefit liquidate the debt? My experience has been that those with significant wealth use life insurance to protect against estate taxes, not retirement income, but you may have a good thing going. Best wishes.

James from Massachusetts.
The $920,304 amount of Table 2 was derived as follows. The “Asking Prices” were extracted from the website source and placed in an Excel spreadsheet as a table with 30 vertical cells. These values were used by a link from a calculation worksheet and as such were never touched manually. Barry from Kansas noticed the “out of line” price for 2027 and quite frankly, I am at a loss for an explanation. The 30-line table would be too long for the publication so I reshaped it into Table 1 by cut and paste in the worksheet, but somehow I must have “finger-poked” the 25.00 into the table. I do apologize for not catching the error prior to submission. The asking price for May 15, 2027 was 60.401 and that value was used in the calculations. James, the arithmetic is as follows. The May 2012 asking price in Table 1 is 99.987 meaning that a $40,000 maturity will cost 0.99987 times 40000 or $39,995. The May 2016 asking price was 95.797 so a $40,000 maturity will cost 0.95797 times 40,000 or $38,319 and for two of them $76,638 would be required. The May 2041 asking price is 34.196 and a $40,000 maturity would cost 0.34196 times 40000 or $13,678. As you can see the further out the maturity: the deeper the discount. This approach is also somewhat conservative in that the in 2016, 2021, 2026, 2031, and 2036, it will not take $40,000 to purchase the income for 2042 to 2046, but I did not address that because the “asking prices’ for those years would be unknown in 2012. The selected 30 line item calculations were transferred from the calculation worksheet to Table 2, again “automatically” so as not require and manual entry of numbers. (This is accomplished by visual basic programming behind the spreadsheet with the click of a button.) A Similar procedure was used for Table 3. Hope the foregoing is helpful.

Binoy from California.
I hope my response to James is helpful to you also. I have checked my calculations and get repeated results.

Daniel from Pennsylvania.
Apparently so. Relative to the values in Table 1, as of Friday, 6/22 the May 15, 2013 asking price is 99.883 with a yield of 0.12%, the May 15, 2027 asking price was 69.493 with a yield of 2.48% and the May 2041 asking price was 42.889 with a yield of 2.95. If I performed this analysis with the June 22 asking prices, the cost would be $969,956 for Table 2.

B from NY posted over 5 years ago:

If this is in an IRA account how does one calculate the RMD? Could I be forced to sell to take the RMD?

Jim from RI posted over 4 years ago:

It is an interesting approach. I think the risk of inflation would eat away at the purchasing power too much to make this an effective retirement plan though. I am still working and have twenty years to go until retirement but I think I might start a ladder for 20 years out once rates go above historic inflation levels.

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