Imagine making the following pitch to a prospect: “Mr. Client: I have an annuity that, beginning at age 85, will pay you the retirement income you need every year for the rest of your life–guaranteed. You need only set aside from 5% to 15% of your investable assets to purchase this product. There’s just one catch: If you die before reaching age 85 you get…nothing.”
If this sounds like a killer product for the advisor’s portfolio, you could be onto something big. But if you think it won’t attract many sales, you’re probably not alone.
The product is commonly referred to as longevity insurance and (in academic circles) the advanced life delayed annuity. It has been on the market only a few years, but by most accounts, it has been slow to gain traction.
Sources tell Annuity Sales Buzz that only a handful of insurers carry it, among them MetLife, The Hartford and New York Life. Not many producers know about the product, they say, and fewer still understand this annuity’s true power and how it should be marketed to clients.
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As a percentage of single premium immediate annuity (SPIA) sales–itself a small part of the overall annuity marketplace–longevity annuities constitute but a miniscule slice of the pie.
Yet, to hear John Olsen tell it, longevity insurance has the potential to transform distribution planning as we know it. “In my view, this represents a genuinely new paradigm, a wholly different way of perceiving the retirement income landscape,” says Olsen, a chartered financial consultant and principal of Olsen Financial Group, Kirkwood, Mo.
“Unfortunately, it is generally looked at–and grossly misunderstood–using glasses that have been forged with an investment mindset.”
By that, he means that too many producers and clients focus on the prospect of losing their investment or on the longevity annuity’s internal rate of return in assessing the product’s merits. The appropriate point of reference, he says, should be the product’s value as a risk management play–i.e., its ability to provide, at potentially much lower cost than alternative solutions, a hedge against living too long.
Longevity insurance thus eliminates one of two “imponderables” that can make retirement distribution planning notoriously difficult: not knowing how long one will live.
The other imponderable, says Olsen, is that clients don’t know what their future investment returns will be. Perhaps just as importantly, they don’t know the sequence in which investment returns will occur, which can yield dramatically different results, depending on the sequence.
“Because of these imponderables, you don’t know the period over which you’ll be taking withdrawals or the appropriate withdrawal rate,” says Olsen. “And you want to avoid the one big risk in retirement income planning, which can be stated as a question: What are the chances that my account balance will fall to zero before my blood pressure does?”
Part of the beauty of longevity insurance, sources say, comes from its leverage: the ratio of the benefit to the amount one has to pay to get that benefit. The greater the ratio, the greater is the leverage.
A second key benefit can be measured in the product’s large “mortality credits.” Because only a fraction of all policy holders will live to the requisite age to begin receiving income (or to recover the premium they paid), the insurer can charge each individual in the “risk pool” much less than would be necessary for a conventional single premium immediate annuity.
A third benefit stems from the promise of a lifetime payout. Because the product provides income at advanced ages, clients can boost IRA distributions in the early years of retirement when they’re more likely to enjoy and take advantage of an enhanced income. They also can be more aggressive with their portfolio allocation of other investments.
“What is really compelling about longevity insurance is the behavioral aspect,” says Moshe Milevsky, the executive director of The IFID Centre and an Associate professor of finance at the Schulich School of Business at York University in Toronto, Canada. “You can engage in different behaviors with confidence–perhaps going to Europe more often during the early years of retirement–because the later retirement years have been taken care of.