People are living longer and healthier lives, which means they should be happier. But in the life insurance industry-which rests heavily on the ability to accurately predict death-this fountain-of-youth phenomenon is causing some concern. And not just among actuaries.
"Generally speaking, an insured client is more concerned about outliving their assets than dying too soon," says William H. Tate, senior vice president and chief marketing officer of Transamerica Occidental Life Insurance Co.
That, Tate asserts, means that the importance of financial planning is as crucial as it's ever been in mapping out the retirement years of policyholders. But it's getting tricky. One reason is that as medical advances and other factors lengthen life spans, the insurance industry is basically in catch-up mode.
The industry's mortality tables, for instance, are more than 20 years old. A committee of the Society of Actuaries and the American Academy of Actuaries is working on an updated table, but it's not expected to be completed until next year at the earliest.
"Currently, the annuity tables go up to age 115, with sort of an educated guess as to what the mortality rates are above 105 and so on," says Robert J. Johansen, a fellow of the Society of Actuaries, who is chairing a symposium next year that will focus on how lengthening life spans are impacting the industry.
In the meantime, insurance companies are dealing with longer life spans in piecemeal fashion-at a time of intense competition for policyholders. Companies, for example, have been raising the bar on how old someone can be for them to write a policy. Policies with large face amounts are being written for people in their 80s, says Tate. Some companies claim to take policyholders up to the age of 95, notes Johansen. "Twenty years ago, you wouldn't see those kinds of coverage available," Tate says.
Declining mortality rates also have contributed to lower premiums and extended maturity dates. Although policies traditionally have been designed to endow cash value by the age of 95 or 100, policies are now being extended to the age of 115 or more. In some cases, the period is indefinite. "I've seen a couple of cases where they don't put a date on it," says Steven J. Schneider, spokesman for BISYS Insurance Services.
Companies are not only relaxing their rules on age, but also on health. Some of them are giving standard ratings to people who traditionally would be charged substandard rates, says David Decker, director of advanced sales and marketing with Nathan & Lewis in New York.
"They're now willing to take a 70-year-old who has slight hypertension and push him into a standard class because it would be affordable to him or her," Decker says. "I gather the profit margins have got to be narrowed, but that's how competitive it's gotten."
That's why this year, more than ever before, has been a buyer's market for insurance, Decker says.
Declining mortality rates largely are responsible for the friendly premiums, says Herb Daroff of Baystate Financial Planning in Boston. "As the mortality tables are stretching out, as the mortality assumptions are stretching out, the products are getting lower in price," he says. "It's generating products with significantly greater early year cash value ... (and) it's certainly not attributable to higher investment returns."
As one consequence, customers are more sensitive to quality, as opposed to just price shopping, Decker says. One thing customers are looking for is flexibility, he says. Buyers of term insurance, for example, are demanding better conversion options. "The idea would be to have extended security," he says.
Products also are going through a mortality-driven evolution.
Combination products, such as those that allow life insurance contracts to be converted into long-term care policies, arebecomingmorecommon. UnumProvident Corp., for example, introduced a product last year that allows disability-insurance customers between the ages of 60 and 70 to convert to long-term care insurance. "It's currently our No. 1-selling product," says Richard Magro, UnumProvident vice president for individual products and marketing.
But even with the changes, the fear among clients that they could indeed live beyond their income and asset-protection plans can be a real one. Schneider says there already have been cases of people who have outlived, or are close to outliving, the maturity dates on their life insurance policies, with disastrous results. In one case, a 94-year-old man in Ohio, several months from turning 95, stands to take an income tax hit on $1.1 million in policy loans that accrued over a 22-year period.
In yet another case, a 94-year-old woman in New York is facing a similar tax hit on a second-to-die policy that she thought was safely moved out of her estate years ago. "She did everything a grantor is supposed to do except die," Schneider says.
Things are getting dicey on the lower end of the mortality tables as well, he says. Mortality rates are getting so low for some groups, Schneider says, that pricing is a matter of guesswork. He cites as one example a 25-year-old female, with a "preferred," Class I rating. "We don't know what to charge these people," he says. "Nobody dies at 25, female, Class I ... If we base it on raw data, they shouldn't be charged for the first $200,000 (of insurance). They just don't die."
Likewise, the lengthening life spans of females has led to a paucity of second-to-die death claims. Some companies selling second-to-die products for several years have yet to experience any claims at all, he says.
Longer lives, and longer retirements, point to the need for planning, says Transamerica's Tate. "Go back 50 years ago, when someone retired at 65, maybe they had a life expectancy of five to eight years. Today, at 65, they may have a planning threshold of 40 to 50 years," he says. "Good planning from a financial planner or advisor is first and foremost."
Tate feels income annuities will play a larger role in advisors' strategies, since they guarantee an income stream at a time when people are seeking to enhance income protection. Adding to their viability is the fact that some companies are getting creative with income-annuity products, giving them a variable spin.
"They do provide a long-term income stream, and that's one thing that I think is increasingly important in the marketplace," he says.
Schneider notes that income annuities have their own quirks when it comes to mortality issues. In some cases, holders of single-premium immediate annuities, with guaranteed lifetime incomes, are getting a better rate of return the more unhealthy they are-simply because their projected life spans are shorter. "You're basically going to the client and saying, the sicker the better," Schneider says.