Longevity insurance, offered by an increasing number of insurers, may seem the answer to a client's fears of running out of money. It is especially attractive for those with a family history of living well into their 80s.
Also known as a "deferred-income annuity," longevity insurance lets policyholders invest a lump sum or make periodic premium payments and set an income start date in the future. On that date, the policyholder can begin receiving insurance company-guaranteed income payments for life. Between the initial premium date and the income start date, some policies let policyholders continue to purchase more future income by making additional premium payments. Some policies also may let clients defer or accelerate the income start date as personal needs change.
Longevity policies are offered by major insurance companies, such as New York Life, MetLife, Northwestern Mutual, Symetra, The Hartford and Prudential. Contracts have period certain and joint and survivor payout riders, permitting a spouse or beneficiary to continue to receive payments in exchange for lower payouts.
"The majority of current retirees rely primarily on pensions and Social Security to meet their daily expenses, with annuities making up only 4% of their income," says Jafor Iqbal, Limra associate managing director of retirement research. "We expect to see fewer Americans retiring with pensions and more relying on their personal savings to fund retirement. Annuities will provide a reliable way to convert that savings into a guaranteed income stream."
But as tempting as this type of annuity might sound, beware that interest rates are at record lows. Because income projections are based on today's low rates, your client may have to put more money down to get his or her desired future income.
That's one reason that Samuel Baldwin, an Andover, Mass.-based financial planner, doesn't recommend this type of product. His analysis shows the real rate of return on the annuity is too low.
"Would we be happy with a 1.51% real rate of return for a 35-year investment at age 55 to age 90?" he asks. "I view this as a bit of a tough sell. The problem with the 55-year-old purchaser is that he/she would be likely to beat the internal rate of return with a moderately invested portfolio over 10 years leading up to retirement at age 66."
So is it worth considering longevity insurance for clients?
Gerontologists say that longevity planning makes sense. People may live longer. As a result, they are expected to suffer greater costs due to the need for long-term care. Advisors also face the task of helping clients with deteriorating cognitive function.
Leonid Gavrilov, gerontology professor at the University of Chicago, cites these characteristics that may help predict client longevity:
Individuals born to mothers under age 25 have a greater chance of living to 100 compared with individuals born to older mothers.
Females typically live longer than males.
People who live in rural or low-income areas tend to have shorter life expectancies than those from urban areas.
The heaviest 15% of the population have little chance of living to a ripe old age.
The wealthier, more highly educated and married populations tend to live longer.