Longevity insurance: purchase on the risks of life too long

Most people buy life insurance to protect against the risks of dying too soon. Now, there are new products that offer the same protection if you live too long.

He is known as an assurance of longevity, and there is clearly a huge market for it: life expectancy is on the rise fluffy are on the decline and most people do not have enough savings for transport over two decades or more of retirement. This is not lost on the insurance companies, who would like to that you think produces a pension of sorts - although you have bought with your own money.

I wrote on the advantages and disadvantages of the longevity of insurance - which, at its core, is really just an annuity - late last year. But now, New York Life will implement its own version, which he calls an "annuity guaranteed future income", on 11 July.

So how exactly does it work? With immediate basis, also known as pension income, give you a lot of money to an insurance company in exchange for a life income stream that generally begins immediately.

What is different on the products of the life of New York, is that the income stream is deferred - pay you the premium, but accept the flow of income at some point in the future. But there are two distinct ways to use the product.

With the first way, you can think about it as a way to prepay for an annuity (or pension) well before that you plan to use it. Which makes cheaper than a pension with immediate enjoyment, because, well, there's a chance that you will die before you begin to collect. In addition, the insurance company has the advantage of investing your money over a long period of time. You may purchase the annuity at the age of 55, but decide to begin to gather at the age of 67, for example.

But it can also be used as a pure insurance policy - hence the name, longevity insurance. You agree can begin collection of insurance at a date much later in the future, as your 85th anniversary. So if you live past your life expectancy, you are covered. And as most of the people don't know when they will die, this allows you to spend down your retirement savings more liberal because you know that your payments will be kick later. The great risk, of course, is that you will not see a penny because you die until you can collect.

"Mathematically, it's meaningless," said Christopher Blunt, an executive vice president at New York life, referring to the lower cost of the annuity purely as an insurance policy. "It is probably the more efficient and effective way of pure risk off the coast of the table".

So let's examine more closely some of the numbers. It would cost a 55 year old man $100,000 for the purchase of $1,000 per month of income guaranteed for life starting at the age of 65 years, compared to $103 500 for a woman. (It's more expensive for women because their life expectancy is usually longer).

It would cost $ 122 000 to cover the life of the two partners, which is much lower than the $203 000 it would cost to purchase an immediate annuity (at the age of 65).

But if a man chooses to payments over 10 years, invests $10,000 per year, its income stream could be a little less, perhaps more about $880 per month. This is because the insurance company is investing your money for a short period of time (and there is a higher probability you can collect the stream of income with every year passing). Don't forget that your payments will be influenced by the environment of interest rates: if rates rise, you can lock in a higher recovery rate and vice versa.

If you want to use the annuity purely as an insurance policy, it is much cheaper. It would cost a 55 year old man $12 100 to the purchase of $1,000 of guaranteed monthly income that begins at the age of 85 years, compared to $13,750 for a woman. It would cost a 65 year old man, $17 740, while it would cost a woman $ 21 600. To cover both, it would cost $20 340 if they are all two 55 and $31 240 if they have two 65.

Which appears as a decent deal, until you remember that little bug called inflation--your dollars are likely to be worth much less in the future. One option is to know how many you need in inflation-adjusted dollars and buy this amount.

Now for some of the rules of the game: the payment of the initial premium must be at least $10,000, but the subsequent payments may be as little as $100. You can make payments at any time 2 years before starting the collection of payments.

You also have the possibility to change your departure date. So if you were to take early retirement, you could start collecting early, even though your payments would be less. You are also given one shot to the postponement of the date of your departure, if you cannot postpone the beginning of your payments for more than 40 years of your initial payment.

With regard to cost, a single commission as 5% of the amount of the premium is the amount that you are paid in the end.

There are of course risks associated with an annuity. The most obvious is that you give control of a big pile of money, and you may not live long enough to collect. You have the opportunity to purchase survivor benefits, but which will reduce your monthly payments. For example, you can arrange you for a beneficiary to receive money if you have not started to receive payments, or to continue to receive payments for a certain period of time.

And then there is the question of inflation. You can also buy an option that will allow your payments to a certain percentage each year, but yet again, it will cost. (There is also a feature in which said that if rates rise more than two percentage points within five years of the purchase of the contract, the company will reset your contract to the highest current rate).

And then there is always the question of the financial stability of the insurance company several years in the future. Mr. Blunt noted ratings to triple-A New York of the life of each major rating agencies and said the company 30 billion dollars in reserves of life insurance on people more than 65 years and 5 billion dollars in reserves on individual annuities. And, since the company is a mutual (as opposed to a publicly traded company), he said that he could store as much capital as it necessary since he was not beholden to Wall Street and shareholders.

But what happens if Merck invents the magic pill and we all live up to 105? "Continuous improvement in medicine that allow people to live longer could create losses on our individual Annuity business," he said, "but it would be more than offset by the gains on life insurance higher.". But, he added, if something like that happen, "at a given time, the capacity could be limited."

What is the big reason you would or would not purchase this annuity guaranteed future income?

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Income insurance for the some 80

A relatively new product, called longevity insurance, makes money on these ratings, and you can beat them your position to collect more money. But the point is not to make a macabre bet. Insurance is a way to protect you from running out of money must live you to a ripe old age, but it is in your retirement years in something of a competition with the insurance company.

In its centre, longevity insurance is simply a deferred annuity: give you a pile of money to an insurance company, usually at the time you retire. But guaranteed payments start much later, usually 80 or 85 and for the rest of your life. As with the policies of the owner and other types of insurance, the idea is to waive a smaller amount of money now, for a potentially plu payment later.

While many retirees are reluctant to part with thousands of dollars for a profit, that they can never receive, some baby boomers may decide that is the gamble. Consider this: for a couple of 65 years in good health, there are 50% probability that at least one of them will live up to 92, according to the Society of Actuaries.

Even if you live that long, insurance removes some of the uncertainty of how much you can afford to retire. If you know that you have a guaranteed income stream which will start at the age of 85 years, for example, you may be able to spend a little more aggressive in your portfolio before that date. The idea is to buy enough insurance so that you can maintain your style of life, after payments begin.

"I think that it will be one of the most important investment vehicles for the next decade," said Harold r. Evensky, an independent financial planner in Coral Gables, Florida, who has been critical of annuities in the past. "There is no doubt that a large percentage of the public will face a problem of continuation of their way of life to retirement as daily expenses and inflation erodes their nest egg".

Also that attractive products sounds, at least in theory, there are several warnings. The biggest drawback is obviously that you can never recover your initial premium. Some companies allow your heirs receive all or part of your money, but the addition of these features can double your costs. It may be more cost effective to display the annuity as a pure insurance policy.

"Unlike other annuity products, it has more in common with insurance against fire, said Christopher o. Blunt, an executive vice president at New York life." To operate correctly, you don't want to think of it as an investment. You want to think about the risk of running out of money and how would be devastating, and how much money you will need to put up to take risk off the table. »

In view of the probability, it is less expensive longevity assurance that build, say, a bond portfolio that will produce the same amount of revenue, said experts. It is also much cheaper than buying an immediate annuity, payments begin immediately. It is difficult to generalize, but Jason s. Scott, Director-General of the financial Research Centre motor retired who analysed the longevity insurance, said that retirees might consider cutting about 15 percent of their retirement savings, to purchase insurance.

At the Hartford Financial Services Group, for example, it would cost a 65 year old man $18 425 to the purchase of $1,000 of guaranteed monthly income that begins at the age of 85 years, compared to $23 272 for a woman. It would cost $33 203 to cover the life of the two partners - which is far less than the $ 211,000 they should purchase an immediate annuity. The more you wait to collect revenue, less your premium.

There are risks to consider. Given that your payments do not start for many years, perhaps even decades, inflation can decrease purchasing power of your future payments. Social security, which increases with inflation, will provide partial coverage. But you can pay to purchase a large amount of income, especially if you think that most of your expenses will be vulnerable to inflation, said Mr. Scott financial engines. If you don't expect to receive income for 15 years, you can increase the amount you need from 2 to 3% a year over that period to arrive at a number of corrected for inflation, he added.

Another big issue is the financial stability of specific insurance companies for several years in the future. This is why financial planners suggest buy annuities on the State of several suppliers. A company fail, States have guarantee associations which provide coverage up to certain limits - typically 100 $ to $250 000 - based on the value of your expected pension benefits.

Here is an overview of what types of life insurance are available or coming soon:

This article has been revised to reflect the following correction:

Correction: November 15, 2010

An article in the special section of your money on November 5, on the longevity of insurance, a product that enables people to insure against their retirement capital, describes imprecisely survive the exhaustion that the benefits of a State guarantee association should a failure of the insurance company. The association would provide coverage based on the value of the benefits of pension under the insured; It would not be based on the amount paid for insurance and therefore not necessarily "would pay back the amount that you invested.".

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