Increasing life expectancies are-or should be- changing fundamental planning.

    Time was when a financial advisor's worth was measured by the adequacy of his retirement plans for clients: How did the portfolios perform? Did clients have enough to live on? Then the baby boomers came along, unwilling to sacrifice today for tomorrow, demanding the good life now yet insisting on early retirement.
    The final twist? The boomers, approaching retirement age, are expected to live forever on what their advisors helped them put together for a 20-year or 30-year retirement.
    OK. Not forever. But Bill Bengen, an advisor in El Cajon, Calif., who has done research on longevity, believes that life spans of 150 years, maybe longer, are a good possibility going forward. If so, financial advisors need to get back to their Monte Carlo simulations. Asset allocation should be heavily tilted toward equities, Bengen says. Insurance policies and annuities also need tending if we put any stock in Bengen's prediction that Methuselahs will dominate the future.
    Bengen has three clients now who are in their nineties and in good health. "Science and technology have been on exponential growth curves for a couple hundred years," Bengen says. "We haven't noticed yet, but in the next 40 years, we'll have enhanced intelligence and aging will be reversed. The only thing that could kill us is an accident."
    Because Bengen saw the demographic change coming, he began to do research in 1993 to reconstruct the portfolios of a group of 200 individuals retiring from 1926 through 1975, using normal investment returns and cost-of-living increases every year but changing allocations and withdrawal rates. Details of his study have been published in his book Conserving Client Portfolios During Retirement (FPA Press, 2006.) Bengen suggests that clients in the accumulation phase have at least 85% to 90% in equities and that retirees in withdrawal phase keep 60% to 65% in equities to prevent inflation from eating up their portfolios over a long time period. Bengen also found rebalancing important. He tested rebalancing at periods from three months to 15 to 20 years and found that the optimum time period was six years. He also determined 4.5% to be a sustainable withdrawal rate.
    Many experts are examining this area of increasing life expectancy. In a 2006 paper called Retirement Ruin and the Sequencing of Returns, Moshe A. Milevsky, executive director of the Individual Finance and Insurance Decisions Centre (IFID) and professor at York University, both in Toronto, looks at how long a $100,000 portfolio that earns an average 7% a year during the withdrawal period will last during retirement. If a retiree began monthly withdrawals of $750 at age 65-$9,000 a year-and the portfolio earns a constant rate of 7%, the nest egg will be exhausted at age 86.5, he writes.
    But what if the portfolio earns wildly fluctuating returns with an average of 7%? Milevsky used returns of 7%, -13% and 27%-an average of 7%-rotating the returns each year. Depending on which number he started with, the portfolio would last to age 83.3 or 89.5 or 81.08 or 94.92. As Milevsky notes, his research emphasizes the importance of actual returns, especially in the early years of withdrawal, rather than annual average returns.
    In another paper, Annuitization: If Not Now, When? Milevsky argues that payout annuities have a rightful place in the optimal client portfolio and, depending on a client's desire to consume retirement income vs. leaving a bequest, up to 75% of total wealth or 75% of retirement income can and should be longevity insured. The disappearance of defined benefit plans means that consumers have lost an important part of their longevity insurance, he says. Other income sources with longevity protection include Social Security payments and annuity income.
    What does this mean? All eyes should turn to the insurance industry, where the changing face of retirement provides a golden opportunity. "We must look at the problem of longevity as an industry," says Michael Brink, executive vice president at Nease, Lagana, Eden & Culley Inc., an Atlanta firm that works with high-net-worth clients on wealth transfer. Unfortunately, the life insurance industry has not developed a good reputation for either disclosure or efficient pricing. Brink once headed up a bank trust department where he grew frustrated with claims from various insurers that their own product was the very best policy available. Now he enjoys the opportunity his current position provides to look inside the black box of insurance pricing as very few of us are privileged to do.
    What he discovered is that the carriers who provide retail insurance do, in fact, all have the same clientele, the same mortality tables, similar investment experience. "They have the same starting point, so to say they have distinctly different products is just not true," he says. But now that he serves the institutional market, which he defines as clients with a net worth of at least $10 million, he has access to proprietary products.
    The three primary pricing components of life insurance, according to Brink, are the size of the policy, the lapse ratio and longevity. Affluent clients are better risks across the board. They buy bigger policies, they enjoy better health and longer lives and their lapse ratio is much lower "because they are surrounded by consultants who advised them to purchase the policy for a very specific purpose." Furthermore, their advisors understand the way insurance works and they screen out product salesmen who try to unload policies based on "the best price." Here's the question: Will there be a dribble-down effect, where better products might be offered to the hoi polloi?
    Financial advisors say they see the need for "longevity protection" for portfolios of all sizes. Milevsky tells advisors that they are "risk managers." Even wealthy family members need immediate income. But they-particularly those in later generations, who did not earn the wealth-feel a fiduciary responsibility to protect the family's principal. "One of the risks that came up in a number of families is the preservation of buying power," Brink says.   "With the increase in longevity, we're seeing an increasing role for life insurance."
    Many of his wealthy clients tell him that they didn't earn the family's wealth and although they can use it to live on, they cannot spend it down. If they need to plan to live to be 100, they must have insurance to reimburse the family trust. "Today life insurance is a very live product. It must be managed like an investment," Brink says.
    The insurance industry is beginning to respond, even though most of the response is geared to very wealthy clients who use advisors to design proprietary products. "To design a policy to lapse at 100 is now a very dangerous thing to do," Brink says. "So the industry has come out with guaranteed no lapse." Most carriers today have at least an option to buy insurance to age 110 or 120.
    Paying attention to the development of longevity products and learning to analyze them could provide a big payoff for advisors, and I'm not talking about an insurance commission. Insurance pricing is pretty tough stuff to digest. Insurance products are counterintuitive. The lowest price does not mean the best value. Price quotes are meaningless because they provide nothing but a projection of assumptions. Even sophisticated advisors often misunderstand the way insurance products work. Brink says that a recent caller told him he needed to buy $10 million worth of life insurance for a client and he wanted a quote. Brink's quote? "To be or not to be." Unless you know what mortality improvements the illustration projects, what profitability and lapse rate and other variables are included, the quote means nothing.
    Another reason to pay attention to insurance: Insurance products are improving so rapidly that you probably can help a client find a better product than the one he has. "It used to be that the insurance product you've owned the longest was the most cost-effective," Brink says.
    But with mortality expenses way down and with policies that are more dynamic, "The policy you bought in 1980 is probably the most expensive," he says. Further, until recently, policyholders who wanted improvements to a policy were forced to drop the old one and buy a new one. But now there are products that pass back improvements to all existing policy holders. Brink points to a John Hancock policy introduced in 1996. Over the past ten years, Hancock has made six pricing improvements and passed those back to existing policyholders.
    Immediate annuities that provide income for life are "one of the few insurance products that are undersold," according to Glenn Daily, a fee-only insurance consultant in New York. "If you look at "money's worth"-i.e., the actuarial value of what you get back in relation to what you put in-plain-vanilla, fixed immediate annuities are a relatively good deal. With most insurance products, you're lucky to get back 80% of what you put in, measured actuarially. With immediate annuities, it can be more than 90%. So this is one thing that the life insurance industry does well."
    The industry has also resurrected longevity insurance-payout for life-which provides guaranteed income that typically starts at age 85 in exchange for an initial investment made 20 years earlier. This product might be examined for a client who is 65 and who has saved enough only to last 20 years. That person could buy a deferred annuity that begins payout at age 85. Or he could receive a much larger payout at age 85 by buying longevity insurance such as MetLife's Retirement Income Insurance, which has no death benefit and no withdrawal options until he reaches the age stated in the policy. The longevity insurance provides a fixed payout and no inflation protection. So you get a higher payout if you reach age 85, but less flexibility in the policy-and nothing if you don't live to 85.
    It looks to me like investments, long the financial advisor's centerpiece, are being supplanted by longevity products-many of them yet to be introduced --that provide an opportunity for advisors to add value for clients rather than acting only as a salesman beholden to a company.

Mary Rowland has been a business and personal finance journalist for 30 years, a half dozen of them as a weekly columnist for the Sunday New York Times. She wrote a column called Practice Points for Bloomberg Wealth Manager for six years. She speaks regularly about money and values. Her six books include two written for financial advisors: Best Practices and In Search of the Perfect Model.