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Longevity Insurance?
Old 04-18-2010, 08:39 AM   #1
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Longevity Insurance?

Has anyone considered this strategy? One thing to consider is that even though you lock in income 15 years in the future, the real value of that income will be diminished at the rate of inflation. It was an interesting read either way.

thoughts?

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Old 04-18-2010, 08:49 AM   #2
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I am intending (i.e., leaning toward) delaying my SS till perhaps 70 as a partial inflation adjusted hedge against longevity. DW will take hers at 62. The survivor gets the larger Cola adjusted SS.

I think annuities can be a good idea for certain situations. I have waffled back on forth on using some portion of our assets to create a base income. If we did purchase one, it would probably be later in life and if interest rates were favorable. Currently, I do not think we will buy one.
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Old 04-18-2010, 08:51 AM   #3
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Yes, it's been discussed here a lot -- "longevity insurance" is just a fancy term meaning "annuity." Depending on the circumstances and the *type* of annuity, it might be a decent way to lock in some retirement income you can't outlive, but for many people the best "annuity" is to postpone taking SS, though that can have negative tax consequences as well.
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Old 04-18-2010, 09:16 AM   #4
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What Kiplinger's describes is basically a deferred SPIA. No reason you cannot just wall off the funds (mentally, if not otherwise) in a conservatively invested account and buy a SPIA down the road instead of irrevocably writing a check today to an insurer.
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Old 04-18-2010, 12:20 PM   #5
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Since an annuity is by defination, the opposite of life insurance, I find it strange to call it insurance. Of course, it's also issued by insurance companies, so I suppose there is a marketing link in there somewhere.
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Old 04-19-2010, 08:59 AM   #6
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Originally Posted by bentley View Post
Has anyone considered this strategy? One thing to consider is that even though you lock in income 15 years in the future, the real value of that income will be diminished at the rate of inflation. It was an interesting read either way.

thoughts?

Kiplinger.com
I think that there is some confusion regarding "this strategy". You're referring to the deferred, zero-surrender value annuity discussed on page 2. Correct?

I think it's a fine idea. It maximizes what you want from an annuity (longevity insurance) while minimizing what you don't want (losing control of your assets). I'd have to crunch numbers for a while to see if the theoretical value really comes through after the insurance company haircut. And, as always, I'd also want to compare it to simply deferring SS until age 70.
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Old 04-19-2010, 09:48 AM   #7
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I believe that a strategy like this (Longevity insurance) is well worth considering. It just may be that such a strategy allows you to spend down the nestegg, giving a larger spendable income while you are alive than a traditional SWR method. Since we really don't know when we will go such a plan would compensate for the unknowable lifespan variable.

As I understand it one would take maybe 15% of your stash to fund such insurance/SPIA. The remaining stash would be invested and withdrawn so that it is depleted (or nearly depleted) when the longevity insurance kicks in.

Many traditional retirement withdrawal schemes will leave large unspent balances at your demise (so that one never runs out of money) . The indicated longevity scheme avoids that problem
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Old 04-19-2010, 10:44 AM   #8
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What Kiplinger's describes is basically a deferred SPIA. No reason you cannot just wall off the funds (mentally, if not otherwise) in a conservatively invested account and buy a SPIA down the road instead of irrevocably writing a check today to an insurer.
Isn't there some benefit to buying the "longevity insurance" while younger, expecting to receive a benefit far in the future (if you survive)? The benefit would come from having a portion of those in the insurance pool die off early (actuarially speaking), hence increasing the share that could be paid out to the survivors of the scheme.

As an example, say a 40 year old very early retiree puts in 10% of his portfolio at age 40 to buy longevity insurance that would pay out an inflation adjusted amount at age 80 to meet their spending needs (assume said retiree has a crystal ball). Anyone in that pool of insureds that dies in the 40 years before reaching age 80 forfeits their premium. Which leaves more money to pay those surviving to age 80.

I recall from reading some of Milevsky's literature that the real survivorship benefits to annuities start at around age 65 (the rate of dropping dead hits an inflection point around this age ). So it may not make sense to buy the longevity insurance at age 40, but instead wall the money off and then buy it around age 60-65.
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Old 04-19-2010, 11:02 AM   #9
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Isn't there some benefit to buying the "longevity insurance" while younger, expecting to receive a benefit far in the future (if you survive)? The benefit would come from having a portion of those in the insurance pool die off early (actuarially speaking), hence increasing the share that could be paid out to the survivors of the scheme.

As an example, say a 40 year old very early retiree puts in 10% of his portfolio at age 40 to buy longevity insurance that would pay out an inflation adjusted amount at age 80 to meet their spending needs (assume said retiree has a crystal ball). Anyone in that pool of insureds that dies in the 40 years before reaching age 80 forfeits their premium. Which leaves more money to pay those surviving to age 80.

I recall from reading some of Milevsky's literature that the real survivorship benefits to annuities start at around age 65 (the rate of dropping dead hits an inflection point around this age ). So it may not make sense to buy the longevity insurance at age 40, but instead wall the money off and then buy it around age 60-65.

Cld be, but I wold shop the separate pieces together before signing on the dotted line.
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Old 04-19-2010, 11:02 AM   #10
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I think inflation and purchasing power risk eats up any advantage. One company that offers it had a local presentation. In their scenario, you had to wait 15 years before you could withdraw any money, and then it took about 7-8 more years to get your PRINCIPAL back............no thanks..........particularly for the young.

Buy a SPIA to cover your basic expenses at age 60 and be done with it...........
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Old 04-19-2010, 11:32 AM   #11
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Originally Posted by FUEGO View Post
Isn't there some benefit to buying the "longevity insurance" while younger, expecting to receive a benefit far in the future (if you survive)? The benefit would come from having a portion of those in the insurance pool die off early (actuarially speaking), hence increasing the share that could be paid out to the survivors of the scheme.
As an example, say a 40 year old very early retiree puts in 10% of his portfolio at age 40 to buy longevity insurance that would pay out an inflation adjusted amount at age 80 to meet their spending needs (assume said retiree has a crystal ball). Anyone in that pool of insureds that dies in the 40 years before reaching age 80 forfeits their premium. Which leaves more money to pay those surviving to age 80.
I recall from reading some of Milevsky's literature that the real survivorship benefits to annuities start at around age 65 (the rate of dropping dead hits an inflection point around this age ). So it may not make sense to buy the longevity insurance at age 40, but instead wall the money off and then buy it around age 60-65.
The more I study insurers (I own Berkshire Hathaway stock) the more I'm convinced that they have no freakin' idea what premiums to charge for their coverage. But that's OK, because we have no freakin' idea if they'll actually be able to pay up when the time comes. Witness most LTC policies as Exhibit "A".

So I'd try to hold off buying any longevity insurance product for at least another decade, until the "new" begins to wear off.

Speaking of Milevsky, maybe we should wait longer than a decade. He launched his first salvos against annuities in early '90s, and it's only in last couple years that he's been able to produce an analysis concluding that they are not overpriced. They're not necessarily fairly priced, but they're probably not overpriced.

A while ago I was researching annual mortality rates, and I remember that same inflection point around age 65-- IIRC, a big jump to a 10% risk of dying that year. But almost as interesting is the next inflection point around 80-85... if you can survive that 15-20 year period then you're almost guaranteed to achieve centenarian.
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Old 04-19-2010, 11:42 AM   #12
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The more I study insurers (I own Berkshire Hathaway stock) the more I'm convinced that they have no freakin' idea what premiums to charge for their coverage. But that's OK, because we have no freakin' idea if they'll actually be able to pay up when the time comes. Witness most LTC policies as Exhibit "A".

So I'd try to hold off buying any longevity insurance product for at least another decade, until the "new" begins to wear off.
The thing is, insurers know how to price something that can be calculated pretty accurately by actuaries, and that includes life insurance, auto insurance and property insurance. These mostly have known, fixed liabilities to the insurer using huge amounts of robust data on loss statistics and expected life expectancies.

The things insurers have trouble pricing are usually related to unknown costs regarding services promised by the policy. That includes (to some degree) health insurance, but that "pricing issue" is mitigated by the fact that it's usually only a one-year term and prices spiral out of control, you can reprice it up next year.

LTC is worse because:

(a) there isn't a long history of experience with this product to guide pricing;
(b) one of the "selling points" (in theory) is that you can "lock in a rate" that doesn't rise;
(c) you're basing it on insuring a service with an unknown (but almost always well above inflation) pricing future.

So in reality, when people "lock in" rates for possibly decades, when LTC costs consistently go up more than inflation, when pricing of the product is just a "WAG" -- there's a good chance insurers might price it too cheaply in order to get the business, but over the long term that results in losses that either require premium increases (defeating the "lock in your rate!" marketing) or threatening an insurer with insolvency (which does no policyholders any service).

These are some of the reasons why, as much as I'm interested in the concept, LTC is "no sale" for me as of now. And as for other types of "longevity insurance," I don't know why that would be any harder to price than (say) life insurance or an SPIA.
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Old 04-19-2010, 02:08 PM   #13
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I'd agree with Ziggy, the pricing risk on longevity insurance is noticeably less than on LTC. Insurers are willing to guarantee premiums and benefits on SPIAs, they are not willing to guarantee premiums on LTC.
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