When life insurance is like a good lottery ticket

Q: My SGLI premium - Serviceman Group Life Insurance - is due to increase soon when I turn 70. I am trying to figure out if I should continue or drop the $200,000 policy. I also have another level-term policy for $150,000. The premiums for that policy are about $1,800 a year.

We have no debt. We can easily pay our monthly household bills. Discretionary funds allow us to travel, give to charities and help out our kids. Our monthly cash flow comes from my military and VA disability retirement, Social Security, dividends and royalties.

We both work part-time, but that accounts for less than 10 percent of our monthly income. Our managed invest-

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See Burns

ment portfolio is currently worth a little more than $2 million.

I have a heart condition and have suffered five heart attacks over the past 25 years, but have had no events in the past seven years. When I die, my wife will get 55 percent of my military retirement pay. She will also have her own Social Security income, and access to our portfolio if more monthly cash is needed.

My question is, should I take the current $300 monthly premium costs of SGLI and invest it, or continue on with the insurance with a new monthly premium of $460? - M.H., San Antonio, Texas

A: Two questions need to be answered here. One is: Will your other resources protect your wife from a loss of living standard if you die before she does?

The second is: Should you use life insurance as a good lottery ticket play?

The answer to the first question is that the policy is probably unnecessary. Why? Because your other sources of income, not to mention $2 million in financial assets, mean that the $200,000 policy death benefit won't change things much. That means you don't need the policy.

But as a financial "bet," a kind of life-lottery ticket, the policy may be useful and valuable. The new monthly premium of $460 is tiny compared to the $200,000 death benefit.

The insurance company would probably be delighted if you dropped the policy. Here's why. The life expectancy of an average male (one without a heart condition) at 70 is about 14 years. That means a typical policyholder will likely pay in about $77,000. But the insurance company is liable to pay out $200,000.

A small industry in life settlements has grown around such differences, with investors willing to pay you for the privilege of taking over your premiums so they can collect the eventual death benefit. Most life settlements are for universal life policies, but term policies are eligible.

You can learn more about a possible policy sale by visiting the website for the Life Insurance Settlement Association at www.lisa.org. Life settlements, long unregulated and subject to abuse and scandal, are slowly evolving into an accepted, but minor, asset class. One indication: Warren Buffett's Berkshire Hathaway has invested in them.

If you are sure you can continue the payments, the life policy can be viewed as a sophisticated lottery ticket with a high probability that you will "win" - get back a lot more money than you put in.

The policy also has another use: It could be considered as a substitute for long-term-care insurance - the death benefit would recoup $200,000 of nursing care costs.

Q: I am 54 and have $500,000 in my 401(k) and $35,000 with a brokerage firm. My wife is retired and draws $1,300 a month in Social Security. Our youngest is at an out-of-state university and will be a sophomore.

I'm tired of working. I owe $120,000 on a $400,000 house with no other debt. Any suggestions? - M.S., by email

A: Early retirement requires a lot more planning and spouse-communication than retiring on the usual timetable. One big unknown is health insurance, since you are 11 years away from Medicare. If the Affordable Care Act remains in force, you can make it to 65 at a reasonable cost. Otherwise, all bets are off.

The best thing you can do is to find out how flexible your spouse is. Then you can plan, together, how to use your $800,000 net worth to support a low-cost lifestyle. Do that, and you can retire when you want. It will help if you are willing to retire to another country, such as Mexico or Panama.

• Scott Burns is a principal of the Plano, Texas-based investment firm AssetBuilder Inc., a registered investment adviser. Questions about personal finance and investments may be sent by email to scott@scottburns.com.

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