What is longevity Insurance, and does it belong in your retirement plan?
Longevity insurance is a contract entered into with an insurance company whereby an investor pays an insurance company a specific amount of money today in exchange for a monthly income stream in the future. It is typically used to provide older retirees with cashflow should they live beyond a certain age.
How does this annuity work?
Using an online annuity calculator, the following illustrations were created:
· If a 60-year-old male invests $100,000 into this product today, in 25 years (at age 85) he would begin to receive monthly payments of $3,257 for the rest of his life.
· If a 60-year-old female invests $100,000 into this product today, in 25 years (at age 85) she would begin to receive monthly payments of $2,514 for the rest of her life.
(The illustrations taken were run on the day this article was printed, and cannot be relied upon as terms that are available when you read this article.)
What are the factors that determine the future monthly payment amounts?
Gender. As you can see by the illustrations above, one of the greatest variables is gender assigned at birth. Females generally have a longer lifespan than males, and thus are given a lower monthly payment, all other factors being equal.
Age. The monthly payouts will continue until the annuity holder passes. The older the person is when the payouts start, the larger the payouts will be.
Amount invested. Probably goes without saying, but the more you put in at the beginning of the contract, the larger the monthly payout will be.
Interest rates. There will be an interest rate return factor that goes into the calculation of the payout. The lower the interest rate, the lower the payout amount.
Risks
While the monthly payments are guaranteed, they do not come without significant risks.
You die too soon! It’s been 25 years in the making. You have been putting x’s on the calendar every day, and THE day has finally arrived. You log on to your checking account, and you see it. Your first payment from the annuity. Life is good! The next day while crossing the street, you get hit by a bus. You tied up $100,000 for 25 years, and all you got was a lousy $2,514.
Inflation Over the long term, consumer prices rise. $1,000 may purchase a lot more goods and services today, than the same amount will in 25 years. And if inflation spikes, that $1,000 will have even less purchase power. The flat payout amount can pose a massive risk in an inflationary environment.
Equity markets wildly outperform If equity markets do well, the return on your annuity will be significantly less than what you would have made in the market. The tradeoff is that you never had any of your money exposed to the stock market’s fluctuations, and you will receive a steady, predictable stream of payments. But taking this conservative option could come with great opportunity cost.
Dealing with annuity salesman
At the beginning of the meeting with the annuity salesperson, you have a very clear picture of what you want - an advanced life deferred annuity. But during the conversation the salesman throws a bunch of other terms at you. Single life period certain? Single life cash refund? Do you even want a deferred income annuity? Have you looked at are equity-indexed variable annuity? Uggh!
Why would she talk you out of a simple deferred income annuity? Well, the commission she is going to earn, of course. These advanced life deferred annuities do not generate the greatest commissions. Be prepared to have other products thrown at you. If you feel yourself becoming overwhelmed, politely end the conversation.
Suggestions
If you still feel like longevity insurance may be a good fit for you, there are some steps you should take.
First, speak with a fiduciary, fee-only financial advisor about how this product will fit in your overall retirement plan, if at all. A fiduciary, fee-only financial advisor will provide you with objective advice. Never rely upon an analysis of the person who is selling you the product. The commission they could potentially earn may be influencing what they are telling you.
Second, get several quotes from various annuity providers. Always make sure you are comparing apples to apples. Get quotes, and carefully compare the contract terms.
Finally, go with a highly rated insurance company. Make sure you check the issuer’s ratings with A.M Best, Fitch, Standard & Poor’s and Fitch. Only the best will do.
Summary
Longevity insurance products have significant risks, and there are many factors that go into determining whether or not they are suitable for you. As with any other financial product, make sure you discuss these with a fee-only, fiduciary financial advisor (not the one selling you’re the annuity) to see if this product makes sense for you and your retirement plan.
About the author:
JP Geisbauer is a Certified Public Accountant and a Certified Financial Planner ®. He is the founder of Centerpoint Financial Management, LLC, a retirement planning, investment management, and tax planning firm located in Irvine, CA.
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Disclaimer:
This article is for general information and educational purposes only. Nothing contained in this article constitutes financial, investment, tax, or legal advice. Before taking any action on any topic discussed in this article, please consult with your financial planner, investment advisor, tax professional, and/or attorney for advice on your specific situation.