Dear Mr. Berko: I have cancer, and the prognosis is not good. I am 71 and might be able to live for another seven to eight years with proper care, which, as you know, is very costly. This cost is hard on my family and draining our income. I have $330,000 invested in the stock market (mostly blue chips), and the dividends earn me about $11,000 annually. My pension, Social Security and investments do not cover my expenses today. I need more income to live on, and my investments must be very safe. My stockbroker suggested a single premium immediate annuity that would give me $1,750 a month, or $21,000 a year, on an investment of $280,000. That would be just perfect. He would have me invest the remaining $50,000 in five high-yielding stocks (names enclosed) paying over 10 percent. I know there are much higher-paying stocks, but I don’t know which ones are good and safe. My daughter suggested I write you for recommendations because you would know some good, safe stocks paying 10 percent or more. Please answer as quickly as you can. We’re nervous and hanging in libido waiting for your answer.
— P.M., Buffalo, N.Y.
Dear P.M.: “Hanging in libido,” now that’s interesting.
There are good companies paying over 10 percent that I can recommend, but I can’t recommend any “good and safe” companies paying over 10 percent. Among the many dictums in this business is, “The higher the yield the higher the risk.” Of the five high yielders your broker recommends, four are neither good nor safe, so their prices and dividends will eventually fall. His New Residential Investment Corp. (NRZ-$16.30) recommendation, paying 12.4 percent, is the only one to keep. Then consider the real estate investment trust Ellington Residential Mortgage (EARN-$14.50), yielding 11.1 percent, Vistra Energy (VST-$17.25), yielding 13 percent, Telstra (TLSYY-$14), yielding 8 percent, and WhiteHorse Finance (WHF-$14.10), yielding 10 percent. These issues are much less unsafe than those he recommended. Still, they’re quite iffy.
And there’s a better annuity solution. It’s called a medically underwritten single premium immediate annuity, though your broker probably knows nothing of them because the commissions are embarrassingly lower than that of the typical SPIA. In exchange for handing over $280,000 for a medical annuity, you would be paid a much higher income than you would receive from the usual SPIA. A medical SPIA doesn’t have hidden fees. And in addition to the reasonable commission costs, the administration fees are low. A medical annuity is basically a straightforward, uncomplicated investment.
However, to qualify for a medical SPIA, you must have a chronic illness along the lines of advanced diabetes, lung cancer, HIV, Lou Gehrig’s disease, kidney failure, Parkinson’s disease or Hodgkin lymphoma. Though this sounds foreboding, a medical annuity can be a life-giver. A 71-year-old purchasing a regular $280,000 SPIA would receive between $1,700 and $1,800 a month, or between $20,400 and $21,600 annually, depending on the company issuing the policy. Yes, that’s a lot more than the $11,000 a year you’re getting from the dividends in your stock portfolio, but the payouts on a medical SPIA — because of your anticipated shorter life span — would be significantly more than those of the SPIA recommended by your broker. A $280,000 investment in a medical annuity could pay you between $2,100 and $2,600 a month.
There is a downside. If you pass away after purchasing a standard medical annuity, the payouts end immediately upon your death. You can structure this annuity to pay survivor benefits, but only if you’re willing to accept lower monthly payments. That said, the lower payments would still be higher than the payouts from a standard SPIA.
Mutual of Omaha, MetLife and Genworth Financial are among the very few companies offering medical annuities. However, I expect that other insurers will begin selling them soon.
Malcolm Berko addresses questions about stocks. Reach him at P.O. Box 8303, Largo, FL 33775 or firstname.lastname@example.org.