Are your clients worried about outliving their income? Are they concerned about spending their retirement assets too early and spending their last years destitute? Enter longevity insurance.
As the name implies, longevity insurance is a contract designed to insure the cost of an unexpectedly long life. The product has yet to make significant waves in the insurance industry, but rising life expectancies could position it as a key product for retirees who have enough assets to maintain their lifestyle through their expected life spans but might not have the income to support themselves if they live longer.
At its core, longevity insurance is a deferred annuity with a very late start date. The “insured” (really, “annuitant”) makes an immediate single premium payment. The contract does not make payments to the annuitant until he or she reaches a particular age—typically 85 years old. The contract then pays a fixed amount on a monthly basis for the remaining life of the annuitant.
Rates for longevity insurance are relatively low, due to the long deferral period and the probability that the annuitant won’t survive long enough for the annuity payments to begin. An article published last month provides rates for one carrier’s longevity insurance product. Under that company’s pricing, a man purchasing a policy at age 55, would receive more than $50,000 a year after age 85 for an initial premium outlay of $50,000. The same product, purchased five years later at 60 would pay only $38,000 a year, and $28,600 a year if purchased at 65. A woman can expect to receive significantly smaller payouts for an equivalent premium payment.
For clients who are staying up at night worrying about overspending their retirement assets, a longevity insurance policy may be a good deal at those rates, although the product can quickly lose its appeal when inflation is factored into its price. Also, current rates could rise due to current low interest rates.
Despite being an annuity at its core, longevity insurance is susceptible to the same risks as a life insurance policy because it requires substantial upfront payments and pays only after many years. Like life insurance, a longevity insurance policy’s viability depends on the insurer’s financial health. But unlike life insurance, where insureds and their advisors have hundreds of companies to choose from, only a few carriers currently offer longevity policies, reducing consumer choice and carrier competition. State guarantee funds do generally cover between $100,000 and $500,000 of present value in an annuity.
Longevity insurance is just a type of deferred annuity; but recasting the product as insurance has advantages. Everyone has an opinion about annuities. But “longevity insurance” is a relative unknown in the panoply of insurance products.
Unfounded resistance to annuities may not be a barrier to longevity insurance. Everyone can be educated to understand retirement income sufficiency risks, and without the baggage often accompanying annuities, longevity insurance may be an easier sell. Who wants to live off Social Security for 15 years if they make it to 100? For those who are worried that they’ll pay the premium and never receive a single payment , longevity insurance policies typically offer a rider that guarantees a return of principal or continued annuity payments to the annuitant’s beneficiaries.
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See also The Law Professor’s blog at AdvisorFYI.