We know that a large number of baby boomers are going to retire with barely enough – or not enough – money to meet their needs. The goal of the advisor is to make these clients’ assets produce as much as possible. Most advisors use only three mechanisms to earn money for their clients: dividends, interest and capital gains. But many advisors overlook a fourth source. There are financial products that use mortality expectations to solve financial problems for clients. I suggest looking into these solutions: they can be a good way to provide value and help retired clients, and others, who really need help.
I would like to give you two examples of products that use mortality expectations to provide value. First, there is a product that is sometimes called a reversionary annuity. It is like ordinary life insurance except there is no lump sum payment. Instead, the beneficiary gets guaranteed income for life upon the death of the insured. It has two benefits. First, it more directly meets the needs of many buyers. For example, there are many cases in which a husband, who is usually older, wants to make sure his wife has financial security for the rest of her life if he dies first. He may be concerned that his wife knows little of investing. Guaranteed income for life cannot be incorrectly invested and cannot be outlived. Second, these products are far less expensive than typical life insurance policies. There are a few reasons for the lower expense. It costs less to make payments over time than to come up with one lump sum, and some beneficiaries die soon after the insured which means the insurance company has less expense. There are even cases in which the beneficiary dies before the insured. In these cases the insurance company makes no payments at all. Your clients might be concerned about that possibility, but think of it this way: if the beneficiary dies they have no need for the money and the fact that the product works this way means that your clients can get more protection for less cost. There are two ways for your clients to respond to the lower cost: pay less or buy a lot more guaranteed lifetime income for the same amount of money. For those whose beneficiaries will live for a long time, this guaranteed lifetime income is a blessing.
There are a number of applications for this approach. Pension maximization is clearly one. Another is a person whose spouse has a health condition that creates substantial health costs. The person with the health condition can live a long time, but has a lower life expectancy than others. Naming that person the beneficiary of a reversionary annuity will not be expensive because of his life expectancy and the product can provide a great deal of protection.
Cary Lakenbach of Actuarial Strategies suggested another application. Parents with severely handicapped children often want to make sure these children have income for life. Reversionary annuities can produce this at a low cost because the severely handicapped have lower life expectancy than others. This makes it less expensive for the insurance company to provide lifetime income. But the special needs offspring is still protected for life.
Reversionary annuities are not available from many companies. I suggest you bring this idea up with the companies you deal with. My guess is that reversionary annuities can provide a good way for you to provide value to a number of clients.
Mathew Greenwald is president of Washington, D.C.-based Mathew Greenwald and Associates.