The Retirement Income Policy Form Of Annuity And Insurance

The retirement income policy is in many ways a variation of endowment insurance. It is a combination of an annual premium deferred annuity and decreasing term insurance. This is shown in the illustration below. In effect, it is a savings contract with a death benefit which begins at $1,000 per $10 of monthly income and decreases to zero at the point where the cash buildup equals the original face of the term protection. During the early accumulation years this death benefit is much larger than that provided by the deferred annuity contract since that contract promises only to return the premiums or the cash value. Thus, it eliminates one of the disadvantages of the annual premium deferred annuity. 

The Modified-Life Contract 

The modified-life policy is essentially a whole-life contract under which premiums are redistributed so that they are lower than average during the first few years and higher than average thereafter. The initial premium may be adjusted upward each year for the first three or five years or kept low for five consecutive years and then increased. The policy is designed for individuals whose protection needs are high but whose incomes are temporarily insufficient to purchase the needed amount of whole-life insurance. A good example would be a married college student. Convertible term insurance would accomplish the same goal, but the increase in the rate from term to permanent insurance at the end of the modified period is likely to be much greater, and there would be no dividends or cash values until the term insurance was converted. The modified life policy is appropriate for the young man who wants permanent protection but cannot afford it immediately. However, unless he understands thoroughly the nature of the contract, the rate increases would cause him to drop the policy in favor of another at a later date. This would be a loss to both the insured and the insurer. 

Return of Premium Contracts 

A number of companies issue whole-life contracts which provide that if the insured dies within a specified period of time
(e.g., within twenty years of the policy date), all the premiums paid plus the face of the policy will be paid to the beneficiary. This contract is basically a whole-life policy with an increasing term insurance rider. Such contracts might be suited to inflationary times when the need for insurance increases annually. However, it is often used as a marketing device designed to make the customer think he is getting something for nothing. Because all the premiums are returned at the death of the insured, the insurance proceeds appear to be free. In many cases an insured would be better off purchasing additional whole-life insurance or perhaps a decreasing term rider instead of a return of premium contract.