October 4, 2010

Push for Underwritten Lifetime Income Products

Advisors need to ask for products that can help their clients

Although financial services companies have developed a number of innovative products to protect lifestyles and provide financial security, there is one product that fills an important need—yet is not widely available. I’m referring to products that use health underwriting to provide guaranteed income for life for people in less than top health.

I am not referring to products for people in poor health, the bottom three deciles of the population by health. There are already products for them. Rather, I am referring to products for people in roughly the 30th to 70th percentile. These are the people who are somewhat “nicked up” by diabetes, high blood pressure, cancer, heart disease or other disease that are likely to negatively impact their life expectancy. These people face a retirement funding dilemma: they could live a long time, which makes it irresponsible for them to spend their savings prior to age 80, or they might not. Many will live far longer; it’s just unclear who those people are. 

Because these nicked-up people will have shorter lives on average, life insurance companies can guarantee them more income for life. Life insurance companies have a tremendous amount of data and very extensive experience in pricing life insurance for these people. A great deal of sub-standard life insurance is sold. Underwriting for annuities that provide guaranteed lifetime income would use the same skills. The result would be products that provide far higher monthly payments for life than currently available. Right now, annuities with living benefits assume that people who buy them are in excellent heath and will live longer than average. These assumptions lower the guaranteed lifetime payouts the insurance companies are willing to make. Actually underwriting and identifying people in less than excellent health would permit higher lifetime payouts to the nicked-up, because, on average, their lifetimes will be lower than those in excellent health.

The cost of underwriting these policies would not be high. In most cases the applicant would just have to answer questions and permit access to a database of prescription histories, which track millions of people. Certainly this would be somewhat more invasive and take more time and expense than the application for current guaranteed income products. But the benefits would be far more effective products and higher income for life for a significant portion of the population. Financial advisors who turn their clients on to these products would have served these clients well and, I am sure, get the referrals and loyalty such service usually earns. The insurance companies who provide these products will gain market share. I am not totally clear on what's stopping these products from development, but I hope that financial advisors will ask their carriers this question.

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