Longevity Insurance???

[samclem]

I'm not sure why you need an insurance company for your idea. A mutual fund company could sponsor the same thing. (You would need an insurance company if the sponsor guaranteed that if less than x% of the buyers actually died, then sponsor would make payments as if x% had died.)

Yes, it's true that we wouldn't need the financial resources of an insurance company in order to guarantee the payments, provided the promise is only that the survivors will get whatever money is in the pot. But one aspect is that the participants have put money into a contract and they have purchased items of value (the stripped TIPS) in common with others. Each participant's share has value but it is unusual in that it cannot be passed on to heirs. To me, the product most like this is an annuity, and those are run by insurance companies. Probably, since the deep pockets of an insurance company wouldn't be required, skilled lawyers could write a contract that does the same thing.

Aspects I like:
-- My expected "take" at age 85 would not be dependent on the vagaries of the market. Large group mortality is a lot more predictable than equity returns.
-- The payoff is not dependent on the promise of a private company to make good on their promise 34 years later.
-- I will defer the decision on whether to buy an annuity until I have better information. If I'm in very poor health when I get the payoff, I'll use the money for a big bash and/or give it away. If I'm healthy I can buy an annuity to assure it lasts as long as I do.

BUT, the common wisdom is that "tontines are illegal in most states". I've never pursued the issue to determine when a legal annuity becomes an illegal tontine.

According to this paper, (from 2009, pg 514) only Louisiana and South Carolina specifically prohibit tontines, so maybe it's not a legal impossibility to do something like this.

 

[Xwd-puzzler]

I'm joining this party late, as I have just discovered this thread. I am very interested in longevity insurance. My focus has been on the theory, and I've only begun looking at the real world, i.e., who offers these plans and are they price appropriately. (I still haven't figured that out.) But if there's anyone else like me, here is a link to a Financial Analysts Journal article that makes the case for longevity insurance. Tell me if you'd like to see more links like this. I've been piling them up. . . .

 

[MichaelB]

Hi xwd-puzzler, welcome aboard. Why don't you stop by over here to tell us about yourself and what brings you to the forum.

 

[Khufu]

There is no mention of any 'return of principal' in the documentation provided to me.

Does it mention what portion of the payout will be taxable?

 

[Gill]

There is no mention of any 'return of principal' in the documentation provided to me.

Of course not. The insurance company isn't going to use that term. I'm sure it says we will pay you $6,000 per year beginning 15 years hence in exchange for your premium of $50,000 today. The point is this is simply a single premium immediate annuity with the start date delayed 15 years.
Bruce

 

[Sun456]

Here is what a quote from that company looks like. I just got this one today. You can click on it to enlarge it. You can see they show the Tax Free Portion of Income which I think is return of principal.

 

[obgyn65]

Yes.

Does it mention what portion of the payout will be taxable?

 

[obgyn65]

Thank you, Sun456. This looks very similar to what I got.

Here is what a quote from that company looks like. I just got this one today. You can click on it to enlarge it. You can see they show the Tax Free Portion of Income which I think is return of principal.

 

[brewer12345]

Just to offer a smidge of clarity: longevity insurance is nothing more than a SPIA which does not start paying out for a number of years after you write the lump sum check and only does so if you are still alive on the date payments are scheduled to start.

If you are being pitched products with a stated roll-up amount per year, some sort of supposed equity market participation, or a cash value, it isn't longevity insurance or a SPIA.

 

[haha]

There is no mention of any 'return of principal' in the documentation provided to me.

They may assume that a person who is buying an annuity knows that return of capital plus some mortality credit plus some interest return is is pretty much what an annuity is. Essentailly, they must either return your capital amortized along with the payments, return it in lum sum at the end (a bond), or steal it. It matters for taxation, so it is possible that the first you will hear of it is when you get your first 1099.

Ha

 

[rescueme]

Just to offer a smidge of clarity: longevity insurance is nothing more than a SPIA which does not start paying out for a number of years after you write the lump sum check and only does so if you are still alive on the date payments are scheduled to start.

If you are being pitched products with a stated roll-up amount per year, some sort of supposed equity market participation, or a cash value, it isn't longevity insurance or a SPIA.

Exactly...

 

[Sun456]

Just to offer a smidge of clarity: longevity insurance is nothing more than a SPIA which does not start paying out for a number of years after you write the lump sum check and only does so if you are still alive on the date payments are scheduled to start.

If you are being pitched products with a stated roll-up amount per year, some sort of supposed equity market participation, or a cash value, it isn't longevity insurance or a SPIA.

The plan I put the quote up for is longevity insurance but you can buy the plan that pays back something whether your are alive or dead (look at the different rows). Or you can get higher payments and get nothing after your dead (first row).

Three of the ones I bought and mentioned earlier in the thread do the roll-up, linked to market indexes and are equity indexed annuities. They both do what I need which is provide income for life. Turns out I did see this one when I was looking but the guaranteed payout for me was a smidge less than those I bought. However, much like the ones I bought the rates have decreased from where they were earlier in the year.

I think the way the quote's longevity insurance is structured is better for someone who wants to leave money for heirs. I don't think those options were available for the annuities I bought. But whether that is the best deal for those who want to leave money behind I don't know since I did not research that type of annuity.

 

[rescueme]

(snip)...and are equity indexed annuities.

Be afraid (of the fees involved).

You are mixing an investment (EIA) with an income (SPIA) product. Two different products, with two different goals.

Not for me/DW, but than again, it's your money...

 

[brewer12345]

Three of the ones I bought and mentioned earlier in the thread do the roll-up, linked to market indexes and are equity indexed annuities.

 

[Sun456]

Be afraid (of the fees involved).

Yes I think I note that the fees eat the account in post #18 of this thread. Some of the sellers even give you scenarios that show how the fees eat the principal so it isn't that hard to figure out.

I'm a little late in answering this but I have bought 4 deferred annuities. I'm 45 and wanted them to start paying at 65. I have no pension so my intent was to create a pension from diversified sources (hence the 4 different companies). I had trouble finding competitive plans that compounded for 20 yrs. So I'm not sure if there will be many that go longer than that.

If you do go this route be prepared to spend alot of time looking at them. All the agents had something but no one had all the plans so you have to shop around alot. In addition you really have to be on your toes to dig through the information and understand it yourself. Don't rely on what the agent tells you as it is often just a part of the story.

The thing to remember is that annuity products are meant to address a certain situation, not to be the end-all be-all for every situation. Although some agents try to pitch them that way. A good way to look at them is as an insurance product, not an investment. I bought myself a pension. I do not expect to see the principal again as a lump sum. I also got some LTC insurance as two of my plans double the payment for certain situations. In addition one of my plans is a variable annuity so tracks more with the market than the others. The other three are called "equity indexed annuities" but really that is just a game the insurance company plays to make people feel they are participating in the market. The fees will eat up the account. What your really getting is the minimum guarantee that they offer in their 'bonus' and their 'guaranteed roll-up rate'.

Just because I give the definition of what an equity indexed annuity is doesn't mean I believe it actually lets you participate in the market. See above.

No one expects every product to be appropriate for every situation. I believe this thread was asking for input from those with experience with these products which I and others have tried to give information about. Clearly some of the nay-sayers do not have experience with the products based on the questions. As it appears they were not really seeking information, just trying to make fun, one could just ignore the questions. However by leaving them unanswered other readers may not get accurate information. I joined this board to broaden my education on financial matters as I'm sure some others have. It is unfortunate that some feel the best way to interact with others is to not have a quality discussion but instead make childish gestures toward them.

 

[brewer12345]

Yes I think I note that the fees eat the account in post #18 of this thread. Some of the sellers even give you scenarios that show how the fees eat the principal so it isn't that hard to figure out.




Just because I give the definition of what an equity indexed annuity is doesn't mean I believe it actually lets you participate in the market. See above.

No one expects every product to be appropriate for every situation. I believe this thread was asking for input from those with experience with these products which I and others have tried to give information about. Clearly some of the nay-sayers do not have experience with the products based on the questions. As it appears they were not really seeking information, just trying to make fun, one could just ignore the questions. However by leaving them unanswered other readers may not get accurate information. I joined this board to broaden my education on financial matters as I'm sure some others have. It is unfortunate that some feel the best way to interact with others is to not have a quality discussion but instead make childish gestures toward them.

Sorry, but these products are in general overpriced, opaque, and massively oversold. If anyone want to have a discussion about them, great. But be prepared for a healthy discussion about the many downsides and gotchas of these things.

 

[Sun456]

Sorry, but these products are in general overpriced, opaque, and massively oversold.

I completely agree which is why I try to state the downsides when I post. But for a small sliver of us they make sense. People like me who don't have kids clamoring to take them into their home in their old age, or relatives trustworthy and astute enough to manage their money as they get older, and with no pension, they are a pretty darn good fit.

As it stands right now, if I do absolutely nothing with the annuities and contribute no more money I will have an income at 65 of $103,342 for life. If I need care at home it goes to $126,843. If I am so unfortunate as to end up in a nursing home it goes to $150,101. I also have a LTC policy that I pay $4 per month for as I locked in a group rate some time ago. As I have no kiddos to pop in and make sure the home I'm in is a good one I want to be able to afford the best should I need it.

Since I only put in 20% of my $s I still have 80% to manage on my own and do the best I can with it. Lets hope I don't run into any Bernie Madoffs or get stars in my eyes and buy off-shore CDs.

In the mean time I struggle to find good reliable places to put the other 80%. I am in the realm of those who don't need to play the game any more as long as I can get modest returns I should be OK. In fact I joined the board to see if there were any things I didn't know about that could fit my scenario.

 

[brewer12345]

I completely agree which is why I try to state the downsides when I post. But for a small sliver of us they make sense. People like me who don't have kids clamoring to take them into their home in their old age, or relatives trustworthy and astute enough to manage their money as they get older, and with no pension, they are a pretty darn good fit.

As it stands right now, if I do absolutely nothing with the annuities and contribute no more money I will have an income at 65 of $103,342 for life. If I need care at home it goes to $126,843. If I am so unfortunate as to end up in a nursing home it goes to $150,101. I also have a LTC policy that I pay $4 per month for as I locked in a group rate some time ago. As I have no kiddos to pop in and make sure the home I'm in is a good one I want to be able to afford the best should I need it.

Since I only put in 20% of my $s I still have 80% to manage on my own and do the best I can with it. Lets hope I don't run into any Bernie Madoffs or get stars in my eyes and buy off-shore CDs.

In the mean time I struggle to find good reliable places to put the other 80%. I am in the realm of those who don't need to play the game any more as long as I can get modest returns I should be OK. In fact I joined the board to see if there were any things I didn't know about that could fit my scenario.

Like I said, waaayyy oversold. It is possible (not certain, but possible) that these things are suitable for you, but for 99+% of the people they are sold to they are a bad idea.

If you have not already, take a look at merger arbitrage funds as a diversifier/modest risk option that is an alternative to bonds and equities. The two I am aware of (and invest in) are MERFX and ARBFX. They have some equity market correlation, but usually only in the short term. Mid to high single digit returns, with a controlled risk profile and a good track record.

 

[Sun456]

Like I said, waaayyy oversold. It is possible (not certain, but possible) that these things are suitable for you, but for 99+% of the people they are sold to they are a bad idea.

If you have not already, take a look at merger arbitrage funds as a diversifier/modest risk option that is an alternative to bonds and equities. The two I am aware of (and invest in) are MERFX and ARBFX. They have some equity market correlation, but usually only in the short term. Mid to high single digit returns, with a controlled risk profile and a good track record.

LOL, that is what I said to the agent who asked if I wanted to sell the things after I bought from him. I knew more about the product than he did and was telling him how to fill out the paperwork and what forms he needed.

Thanks for the tips on the merger arbitrage funds. It gives me a new area to research and see how they stack up with the other things I'm doing. My dull boring parking spot is HSTRX but I also have some preferred shares, in utilities and insurance companies mostly.

 

[brewer12345]

Thanks for the tips on the merger arbitrage funds. It gives me a new area to research and see how they stack up with the other things I'm doing. My dull boring parking spot is HSTRX but I also have some preferred shares, in utilities and insurance companies mostly.

I find precious few real values these days. I would not rank preferreds among them. Some of the oil and gas names are very cheap (especially those with heavy exposure to natural gas). Bonds in general are wildly overpriced. Mostly I am just watching and waiting and will jump when I see values come up.

 

[haha]

I find precious few real values these days. I would not rank preferreds among them. Some of the oil and gas names are very cheap (especially those with heavy exposure to natural gas). Bonds in general are wildly overpriced. Mostly I am just watching and waiting and will jump when I see values come up.

For about 6 mos to a year I have mentioned positively natural gas explorers. I am not really sold on these, because I think there may be more problems than generally recognized with the produciton profiles of shale gas, fracked wells. And there may be more environmental and political problems than are currently widely recognized. Lastly, what a bunch of promotional cowboys are running these things!

So IMO, tricky for truly bet and forget positions. Still, bet and check frequently seemed OK to me, and I took fairly large positions in a couple. On the best of these I pretty much hit the bottom, and it is up 35% in less than 4 months.

Of course most of us sane investors know this is a fool's game, but as I am a fool that doesn't usually bother me.

I plan to look into the two arbitrage funds that you mentioned. I have no bonds beyond 1 year duration, and those are not treasuries!

Ha

 

[brewer12345]

For about 6 mos to a year I have mentioned positively natural gas explorers. I am not really sold on these, because I think there may be more problems than generally recognized with the produciton profiles of shale gas, fracked wells. And there may be more environmental and political problems than are currently widely recognized. Lastly, what a bunch of promotional cowboys are running these things!

So IMO, tricky for truly bet and forget positions. Still, bet and check frequently seemed OK to me, and I took fairly large positions in a couple. On the best of these I pretty much hit the bottom, and it is up 35% in less than 4 months.

Of course most of us sane investors know this is a fool's game, but as I am a fool that doesn't usually bother me.

I plan to look into the two arbitrage funds that you mentioned. I have no bonds beyond 1 year duration, and those are not treasuries!

Ha

When have the oilmen running all but the very largest (e.g. Exxon) ever been anything but outsized, generally assinine personalities? For some reason it seems to go with the territory. I though we were at "hold your nose and buy" stage a few months ago. Story has not fully played out yet, IMO.

I will go out to 5 years on individual bonds if I can find one with an acceptable return for the credit risk. Pretty much have not seen any I want to buy, and the few I still own I expect will get called.

I nibbled at OLN, but I suspect it may be a touch expensive. If it drops for some reason, I will probably take a real position.

 

[Independent]

Yes, it's true that we wouldn't need the financial resources of an insurance company in order to guarantee the payments, provided the promise is only that the survivors will get whatever money is in the pot. But one aspect is that the participants have put money into a contract and they have purchased items of value (the stripped TIPS) in common with others. Each participant's share has value but it is unusual in that it cannot be passed on to heirs. To me, the product most like this is an annuity, and those are run by insurance companies. Probably, since the deep pockets of an insurance company wouldn't be required, skilled lawyers could write a contract that does the same thing.

Aspects I like:
-- My expected "take" at age 85 would not be dependent on the vagaries of the market. Large group mortality is a lot more predictable than equity returns.
-- The payoff is not dependent on the promise of a private company to make good on their promise 34 years later.
-- I will defer the decision on whether to buy an annuity until I have better information. If I'm in very poor health when I get the payoff, I'll use the money for a big bash and/or give it away. If I'm healthy I can buy an annuity to assure it lasts as long as I do.


According to this paper, (from 2009, pg 514) only Louisiana and South Carolina specifically prohibit tontines, so maybe it's not a legal impossibility to do something like this.

Interesting find. I looked, but couldn't get anything that good.
I noticed that the popular US tontines were based on life insurance with deferred dividends. My recollection is that most states (that same phrase) require annual dividends. That rules out that particular format, but not others.

My concept is an immediate payment mutual fund. It simply makes the mechanics of ordinary annuities transparent so people don't think "the insurance company keeps my money if I die".

So I have a regular family of mutual funds with normal transfers between them. The fund choices might include some more conservative options (TIPS) because this is being sold to retirees for income. There is an overriding contract with three key clauses:

1. When you die, your balance is distributed to the other members of the group who are still alive.

2. Withdrawals are capped at a growing percent of your balance. The expectation is that everybody makes monthly withdrawals at their maximum rate.

3. Each year that you live, you get a share of the amounts forfeited in 1. I'd call this a "longevity bonus" - extra money you get for living longer.

It's not necessary to have a closed group as Mr. McKeever assumes. The distributions in 3 are weighted based on the entry age and tenure of the survivors.

The withdrawal caps in 2 similarly reflect the entry age and the tenure of the participants. The percents are calculated so that if the funds return exactly X%, and people die according to some standard table, each individual's monthly withdrawals will be level. (Set X at some number that is believed to represent "real" investment returns, and the monthly payments would grow at the inflation rate.)

I think if there are no guarantees, Vanguard could design this. If the contract guarantees that the longevity bonuses will be at least some amount, even if deaths don't keep up, then I'd need an insurance company to make that guarantee.

 

[rescueme]

My concept is an immediate payment mutual fund. It simply makes the mechanics of ordinary annuities transparent so people don't think "the insurance company keeps my money if I die".

That's not a valid assumption if you are speaking about an SPIA (the only annuity I would recommend, under the proper situation - and yes, I/we have one).

Not to start a discussion/argument, but I see that phrase tossed about like it is fact for all situations. It's not...

 

[samclem]

My concept is an immediate payment mutual fund. It simply makes the mechanics of ordinary annuities transparent so people don't think "the insurance company keeps my money if I die".

That's sounds like a product that would be very useful to a lot of folks. I'm not clear on how the choice of investments within the family of funds works. Does:
A) Each investor make individual choices on the allocation of the funds in his account or
B) Vanguard makes the allocation decisions (like a target retirement fund)

If A) then I could see some marginal gaming of the system for those in ill-health who might select the most highly volatile investment choices available in hopes of a short-term higher balance even at the risk of longer-term decreases in their fund size (since these folks won't care about long-term issues).

One advantage over my "payoff at 85" approach is that the expected growth in monthly checks could start earlier and smoothly increase over time. Also, since investments aren't restricted to stripped TIPS, the expected return to participants is higher--but they are exposed to more investment risk. And if the "Option A" (above) is how it works, each participant's returns would be affected by the investment choices of all the other participants (i.e. I get less benefit from the transferred account balances of those who predecease me if those people invested stupidly and lost most of their money).

Make it "Option B", make the investment options very conservative (i.e. almost exclusively ST govt bonds) and have it run by a MF company of solid repute and I'd be very interested in buying that product as longevity insurance. The transparency you cite, as well as lower costs and the safety of being backed by the underlying assets rather than a single company would make it a far more attractive option than any annuity.