New York -- All over this country, retirement-income tragedies are in the making. Couples who counted on life insurance to create benefits for the widow or to build up retirement cash will wake up one day to a terrible discovery. The policy may lapse, or it may deliver far lower benefits than were promised.
If you're counting on a policy for your old age, go back to the agent who sold it to you, or to someone in his company. Ask for a projection -- on the insurance company's letterhead -- of its death benefits and cash values for the next 30 years. Maybe you're in luck and your plan is working out. But if it isn't, the sooner you know about it the better.
You want a company letterhead to be sure the projection has company approval. Agents are often able to change the assumptions in a computerized projection to make a policy look better than it really is. If that happens, you'll have no way of knowing it. Insurance-company projections may also be overly optimistic, but at least you've weeded out one level of possible misrepresentation.
The retirement-income risk afflicts people who bought regular life insurance policies and those who went for a hot-selling product awkwardly but enticingly known as "pension maximization" -- pension max, for short.
Three circumstances have converged to create this impending loss of income:
(1) Widespread misunderstanding (or ignorance, or deception) by insurance agents as to when an insurance contract can really last for life.
(2) Falling interest rates, which (perhaps unknown to you) have reduced the benefits in many life insurance contracts.
(3) In pension-max deals, the choice a retiree can make about how to take his pension.
A married person can take a pension in one of two ways. A "single-life payout" gives you the maximum possible monthly income but lasts only as long as the pensioner is alive. Once he dies, there's nothing left for his spouse. By contrast, a "joint-and-survivor payout" stretches over the lifetimes of you and your spouse. Monthly payments may be 10 percent to 30 percent lower than with a single-life payout, but at least they're guaranteed to last.
Many agents and financial planners try to talk you out of joint-and-survivor pensions. They recommend instead that you take the higher single-life pension and use the extra income to buy a life insurance policy. If the pensioner dies first, and the pension stops, the insurance proceeds will support the spouse.
Pension-max proposals look good on paper but rarely work out in real life. Agents play such games as leaving out taxes to make your income look better if you go for the pension-max idea, or buying too little insurance to support the spouse for life.
I aired this opinion in previous columns and was buried under angry letters from insurance agents. When I invited them to prove their case, 10 took up the challenge -- but no plan from an agent actually worked. So my opinion stands. (So does my worry about the competence of many agents.)
Since then, one of the risks I warned about has come to pass, not only for pension-max plans but for anyone funding retirement income with life insurance. Interest rates have fallen. In any insurance contract sensitive to interest rates -- universal-life and whole-life plans -- your lifetime benefits are at risk.
If you keep on paying your current premiums, your policy may not last for life. For example, take a Pacific Mutual universal-life policy, sold to a 50-year-old man when interest rates were 11 percent. If you based your annual premiums on that interest-rate assumption, your policy will lapse when you reach age 80, according to a projection recently run for me. At current, lower rates, you're not building up enough cash values to keep the policy in force until late old age.
Any policy originally projected at higher interest rates may face a similar fate. To keep it in force for life, you will have to pay higher premiums. The sooner you start, the less painful it will be.
If you don't start paying more, or can't afford it, your insurance may fail you when you need it most.