The Pros of a Spreading Out Your Client’s Death Benefit

Have you ever been in a competitive situation with another agent and wish you could knock down the premium on a life insurance product while keeping the death benefit the same? Have you ever had a client come to you and as part of their overall financial plan you helped design, needing a certain amount of death benefit associated with their life insurance within a specific budget? How about a client who looks at you when you mention life insurance and says “I don’t want Mama/Papa to run off with a boyfriend/girlfriend with a whole bunch of money after I die!”? (This last one is one I’ve really heard!) There is a rider that comes free of charge, which can solve all of these issues.

A Rider to Spread Out the Death Benefit

A few carriers offer the ability to spread out the death benefit of a policy. The general idea is that instead of paying out the beneficiary a lump sum amount at the time of death, the owner of that policy can annuitize the death benefit, in a fully customizable way, to their heirs. Sometimes referred to as a “poor man’s trust”, these spread death benefit riders allow the owner to control the benefit paid from beyond the grave. If they have a spendthrift spouse or kid and are worried that they’ll take the entire $1 million death benefit and blow it in Las Vegas, they can dial in a smaller lump sum initially, provide a steady income for up to 30 years, and then also have a final lump sum payout at the end.

Spreading Out the Death Benefit Can Reduce Premiums and Raise Payouts

Let’s take a look at some examples here. Jeff and Stacy are 30 years old and have 2 young children. Jeff buys a term life insurance policy with a spread death benefit rider. The policy is applied, underwritten, and approved for $1,089,077. A few years later, Joe suddenly dies in an accident. His term insurance policy had been structured when it was purchased to pay out an initial lump sum to Stacy for $250,000, allowing her to pay off the house, cover his final expenses and wipe out the other credit card debt they had accumulated. Then, for the next 15 years, Stacy received a steady $3,000 per month, every month, until the kids finished school and at the end of the 15 years, she received a $500,000 final lump sum. The final lump sum was used to pay the kids’ college tuition and fees, and help fund Stacy’s retirement.

The total payout in this example was $1,290,000. The policy was a 30-year term policy and by structuring it with the spread death benefit option (at no cost) at the time of application, they were able to save $249 per year in premium. Remember, he only applied for $1,089,077, and that was what he paid premium on, not the $1.29MM total payout.

Here’s another example. Andrew is a 50-year-old male needing a $2,000,000 20 policy to make sure that his special needs daughter is covered if he were to die. At a standard rate, this will cost him $6,170.00 per year in our example. However, he has a budget of $5,000 per year. By structuring the policy to pay an initial lump sum of $250,000 to cover his final expenses, pay off the house, and providing a $250,000 final lump sum for her benefit, he is able to get to the same $2,000,000 payout and provide his daughter with a $5,002 fixed monthly payment for 25 years. And he did all that with only needing to be underwritten and approved for $1,586,916 at the time of application and the annual premium now fits his budget costing only $4,901.83 per year!

A Common Concern: Keeping Your Family Solvent for Years After Your Die

A fairly common objection to life insurance involves concerns about how a beneficiary will spend the death benefit. Some people really are against the idea of their spouses getting large lump sum payouts and “having a good time” without them at their expense. If Robert is 40 and in pretty good health. After filling out a needs identifier with you online, it’s determined that he needs $500,000 to replace his income for the next 15 years while the kids are still in the house. A 15 year, $500,000 term policy will cost him $45.58 per month, but he tells you that half a million dollars is way too much! “Why do they need that much money?! They’re just going to run off and vacation without me. They need only enough to cover my burial expenses.” By using one of these spread death benefit riders, you can now design a policy to have an initial benefit payout of $50,000 to cover the funeral expenses and pay off the car. Then for the next 15 years, while the kids are still in the house, we can replace his $2,500 per month income that “Mama” can’t get at while allowing them the same standard of living they were accustomed to. In this case, the monthly premium savings is minimal, now costing $44.93/month, but he’s accomplished his goal while still providing his family the protection that they need.

Rocky Mountain Can Help You Design A Case For These Clients

Each carrier’s rider is slightly different, but the one thing they all have in common is that they need to be selected at or before the time of issue. They can always be changed or canceled by the policy owner at any time prior to the insured’s death, but they cannot be added after the fact. We can help you with this case design if you have clients that fit these examples.