Longevity insurance may be for you
February 27, 2012 by J. Brendan Ryan
5:33 PM, Feb. 24, 2012 |
There are a lot of risks for retirees to worry about. There is inflation risk, market risk, interest-rate risk, and many more. But there is another risk that is just recently being talked about: longevity risk. This is the risk that one will live longer than the finances were planned for, and that savings and income will run out during lifetime.
Annuities are designed to deal with just such a problem. Most people think of annuities just as investments into which one can deposit money and have it grow without current taxation. They are willing to defer enjoyment of the funds until some later date when they withdraw the funds and pay ordinary income tax on the accumulated untaxed gain.
But the highest and best use of an annuity is more than this. The annuity can be a source of retirement income that one cannot outlive. One can put cash into an annuity and start the guaranteed-lifetime income right away (an immediate annuity), or one can put cash in and delay the start of the guaranteed-lifetime income until a later date (a deferred annuity). The amount of available income depends upon one’s age at the time that the guaranteed-lifetime income starts, one’s sex, and the amount of money in the contract. The insurer bases the payout on the average life expectancy for people of the same age as the annuitant. So, those who live beyond expectancy receive a “mortality gain” from the ongoing lifetime payments. Those who die before reaching life expectancy suffer a “mortality loss.”
Many people who own annuities never start a lifetime income under the contract. In some cases, I suspect, it is because the advisor who wrote the case never told the client that this feature was available. But in other cases it is because either the advisor or the client is afraid of locking the money up and losing control of the money, feeling that they can invest it for a better payout themselves. Unfortunately, many of these people outlive their money. For them the annuity’s guaranteed lifetime income would surely have been a godsend.
Some insurers have developed a vehicle that can help. It is called “longevity insurance.” Don’t be surprised if your advisor has never heard of this. Not one of my annuity suppliers had heard of it either. It is that new.
This vehicle says to someone, “Give us a lump sum now. We will hold it for you. If you are alive in 20 years, we will give you an income guaranteed for the rest of your life, and we will guarantee today the amount of that income.” One can make the single-premium payment at any age and can choose the number of years of deferral.
So, with this in place, a person can be a little freer in investing and consuming the nest egg because there can be a pot of gold, as it were, later in life.
I asked one insurer to run an example for me: A male, age 65, puts in $100,000 and wants to start drawing at age 85. If he dies before that, he forfeits everything. Starting at age 85, he wants his income guaranteed for his life without any benefit payable after he dies.
In this case, he would be guaranteed $2,600 per month for life starting at age 85. Again, if he dies before reaching age 85, there will be no refund of his original payment.
For many, that lack of refund would be too harsh. If the man in our example preferred a refund of his original payment if he died before age 85, his monthly benefit would just be $1,000. Presumably, joint annuities and annuity payouts with death-benefit (“period certain”) guarantees are also available.
The current low interest rates, which are locked in at the time of purchase, are holding down these numbers. As rates improve in the future, the guarantees should improve for those who wait to start this program.
J. Brendan Ryan is a Cincinnati insurance agent. He can be contacted via email atjbryanclu@aol.com.
