Life Insurance and Annuities: Is AARP Looking Out for You?

Before giving AARP life insurance a moment’s thought, know this: You can’t buy more than $100,000 in term coverage or over $50,000 for permanent (the type of insurance with cash-value savings). Rates for term insurance — sold to AARP members age 50 to 74 — are guaranteed for five years. When the term ends, you can continue coverage at whatever new rate the company imposes without reapplying. The insurance also lets a policyholder who is diagnosed with a terminal illness and has a life expectancy of 12 months or less access half the benefit before death. This latter feature offers some assurance that you’ll have the cash to cope with unexpected medical or other costs, if needed, at the end of your life.

AARP permanent life — for members age 50 to 80 — is paid in full at age 95. At that point, you can stop paying premiums but your coverage will continue for life. Permanent insurance is a poor choice for people over 50, however, says Gary Schatsky, president of ObjectiveAdvice.com and a New York-based fee-only financial planner. “For most people that age, there are better ways to save,” says Schatsky. “And term insurance could pay your estate tax bill for less money.”

The most enticing part, if you’re over 50 and want to buy term insurance: You can apply for an AARP policy without getting a physical exam or medical tests. AARP has what you might call a modified “don’t ask, don’t tell” approach.

An applicant must generally answer a few simple health questions. If you’re buying a $50,000 policy, you only need to say whether in the past two years you’ve been treated or diagnosed for heart trouble, a stroke, cancer, lung disease, or diabetes or have been hospitalized or institutionalized. You’ll also need to note whether you had any medical treatments or diagnostic tests in the past three months. So, a heart bypass surgery five years ago won’t count against you. And if you had a hip replaced in the past two years, you’ll probably be approved if you’re otherwise healthy. Smokers and drinkers are welcome, as are scuba and skydivers. (A $100,000 policy includes a few more questions and goes back five years.)

By contrast, most life insurers have tough underwriting standards that may include dozens of questions about your health over the past 10 years, an inventory of your prescriptions, your driving and credit records, risky hobbies, your weight and blood pressure, plus blood and urine samples. And insurers tend to be very leery of risk takers like scuba divers and sky divers. So, if you’ve been turned down by other insurers or fear you would be, you’re likely to find the AARP standards suit you well. Nearly 80 percent of applicants for AARP term insurance are approved, for example.

Cost of Convenience

AARP’s convenience, however, comes at a cost. “If you compare the policies to insurance with more comprehensive underwriting, they’re more expensive,” concedes Hisey. A 55-year-old woman buying a $50,000 AARP term policy might pay $671 a year for five years and then $1,034 a year for the next five years. If she was in excellent health, she could get double the coverage for $205 per year (rate guaranteed for 10 years) from Genworth Financial, an A-rated insurer.

“I don’t know why anyone who could pass traditional underwriting would be interested in AARP’s product,” says Sheryl Moore, founder of AnnuitySpecs.com, a Des Moines firm that provides research on annuity products. But, Moore cautions, “not everyone can pass traditional underwriting.”

Annuities come in many varieties, but they’re all designed to do one thing: provide a stream of income for a period of time. AARP’s approach is to stress safety and simplicity through fixed-rate immediate income annuities with 20-year guarantees from AAA-rated New York Life.

These work like do-it-yourself pensions: You plunk down a premium of at least $5,000 (AARP will not let you put up more than 50 percent of your assets) and New York Life pays the money back to you with interest monthly for 20 years or your lifetime if you make it past the initial contract. Your monthly payments won’t go down if the market tanks, but you will be tying up your investment for the rest of your life. A 65-year-old man putting up $100,000, for instance, would get $587 a month for life. As with most companies’ annuities, if you die before your monthly payments have totaled what you put in, your beneficiary can get an immediate cash refund of the amount that hasn’t been paid out. Alternatively, if you die before receiving at least 20 years of payments, your beneficiary can get the remaining payments each month until the 20-year period ends.

Like many of its competitors, the AARP annuity offers an optional 3 percent annual cost-of-living adjustment as a hedge against inflation. If you take the option, however, your initial payments will start about 25 percent lower than with a standard policy. That’s a significant amount: It would take 10 years before your payments would equal the monthly amounts of a standard policy, and 21 years before your total payout would exceed what you would have received over time with a standard policy. Most AARP customers decline this option.

Since annuities are not federally guaranteed, when you buy one, you’re relying on the insurer to be around for as long as you will. New York Life is one of only four annuity sellers with a AAA rating, so it’s one of the safer bets.

Pulling Money Out

You can also tap an AARP annuity in one of two ways during a financial emergency, which is an unusual feature:

• A one-time withdrawal of up to 30 percent of the value of the remaining monthly payments, based on your life expectancy. But your monthly annuity checks will be temporarily reduced by 30 percent. For example, that 65-year-old man mentioned earlier could pull about $7,200 of his $100,000 annuity at 75, if necessary. His $587 monthly income would be cut to $411 until the balance of his payments was paid out — in a little under four years.
• A payment-acceleration feature lets you receive six monthly payments in a lump sum. The 65-year-old man could extract $3,522. As with the one-time withdrawal, your remaining payments would shrink to reflect the payment acceleration.

Competitive Monthly Payments

The size of your monthly payments is fixed when the contract starts. Exactly how much you’ll receive depends on your age when you buy the annuity. The older you are, the bigger your payout. A 75-year-old man buying a $100,000 AARP annuity would receive $719 a month, or 23 percent more than the 65-year-old’s $587.

The AARP/New York Life monthly payout amounts are lower than what you could earn from a lower-rated insurer but higher than annuities from other AAA-rated companies. AIG, rated A-, doles out more for its annuities sold through Vanguard — $607 a month for that 65-year-old man, or about 3 percent higher than AARP’s. But you are taking a bigger chance on the insurer being around as long as you. New York Life’s payout is significantly larger than what other AAA insurers offer, though: $548 from Northwestern Mutual and $489 from TIAA-CREF for the 65-year-old.

Could you make more money investing in the stock market or with a lower-rated insurer? Possibly. But New York Life’s top safety rating is worth the lower monthly payout for customers like George Borders, 70. A self-confessed “belt and suspenders kind of guy” in Tallahassee, Borders invested half his retirement savings in an AARP annuity this year. “AARP said to me, ‘We’re going to pay you $3,184 per month for the rest of your life, and whatever’s left, we’ll pay to your wife and kids until it’s used up,’” he says. “This was right for my personality.”

More on MoneyWatch:

• Is AARP Looking Out for You?
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