Longevity Insurance

[Independent]

We occasionally talk about longevity insurance (i.e. deferred income annuities with no cash surrender value). I always think that it would be nice if there were multiple companies offering the product, the only one I know of is MetLife.

I recently heard about this. There is at least one other company -

In February, New York Life Insurance Co. announced that sales of its new "deferred income annuity" surpassed $230 million within six months of the product's July debut. That's 10 times the company's sales goal for the first six months. The product now accounts for 35% of overall income-annuity sales through the agents of New York Life, the nation's biggest seller of plain-vanilla income annuities.

Now $230 million isn't much. If the average sale is $200k, that's only less than 1,200 sales for a company that operates in all 50 states. I also heard that the NYL results have generated interest in other insurance companies, and we may be seeing more options.

Of course, this isn't intended as any sort of endorsement of this specific product, NYL as a company, etc. I just think that competition is a good thing.

Should You Buy 'Longevity' Insurance? - WSJ.com

 

[M Paquette]

I bought mine using payroll deductions back when I worked. The payout will start at age 70 if I'm around, and there's a nice survivor benefit. I got it from these real nice folks down at the Social Security office.

 

[obgyn65]

As documented in other threads, I started to buy deferred income annuities in 2012. Payout will start in 15 years. Only time will tell if this was a good investment or not.

 

[pb4uski]

My longevity insurance is waiting until I am 70 to start drawing SS.

 

[Dawg52]

I bought mine using payroll deductions back when I worked. The payout will start at age 70 if I'm around, and there's a nice survivor benefit. I got it from these real nice folks down at the Social Security office.

Hmmm......I think I did something similar. Hope it doesn't end up being a Madoff type of investment.

 

[hlfo718]

The idea sounds good but the problem is you are hoping the insurer will still be around and stay relatively strong, inflation does not sky rocket, and you cannot invest and get a better return.

I looked at the NY Life offer last year, the rate of return you actually get is so low, you can simply buy a mix of Treasury and high quality bonds, have them mature, then buy a SPIA, for less money.

Off course if this gives you a piece of mind that you won't run out of money, is fine to do. But I would stick with the mutual insurers like NYLife, MassMutual, USAA, TIAA, & Northwestern since they don't have shareholders to please and pay the dividends to policy holders instead of shareholders.

 

[Independent]

The idea sounds good but the problem is you are hoping the insurer will still be around and stay relatively strong, inflation does not sky rocket, and you cannot invest and get a better return.

I looked at the NY Life offer last year, the rate of return you actually get is so low, you can simply buy a mix of Treasury and high quality bonds, have them mature, then buy a SPIA, for less money.

Off course if this gives you a piece of mind that you won't run out of money, is fine to do. But I would stick with the mutual insurers like NYLife, MassMutual, USAA, TIAA, & Northwestern since they don't have shareholders to please and pay the dividends to policy holders instead of shareholders.

Good stuff, it's nice that somebody has researched this. The article didn't say if NYL offered a CPI adjusted version, that complicates things.

Would you be willing to share some numbers?

 

[hlfo718]

Essentially I took what was in the NYLife illustration and here are the numbers they provided.

Female, 54, retire at the end of 11 years, 10k a year for 10 years, with annual longevity income of $8,540.

I assume 01/01/2013 is year 12, where she begins collecting her income and I am assuming is a lump sum payment at the beg of year.

So I went to ImmediateAnnuity.com to see how much it will cost to buy an annuity paying 8,540 and it comes up around 148,776, and this is with cash payment option. But keep in mind the illustration is over 1.5 years old and rates have gone down a lot since then. So I took a 10% discount to factor that in and the drops to 133,898.

I used this plus the 10k annual investment and plugged into excel and figured out the IRR is around 4.46%.

Now 4.46% today may sound high but back in 2002 T-Notes were yielding mid 4% and TIPS were yielding real yield of around 2%. You could have invested conservatively in Vanguard Wellesley and wind up with 20% more than what was needed to buy the SPIA.

While my method may not be perfect but it gives me an idea if it is worth committing a large sum each year for the next X years for this product.

 

[Stanley]

I bought mine using payroll deductions back when I worked. The payout will start at age 70 if I'm around, and there's a nice survivor benefit. I got it from these real nice folks down at the Social Security office.

+1

 

[brewer12345]

Some thoughts on how to pick an insurer here: Life, Investments & Everything: How To Buy Life Insurance

"Generally speaking, you want an insurer with a claims-paying rating of at least Aa3 (Moody's)/AA- (Standard & Poor's)/A+ (AM Best). The larger the company at a given rating, the more stable they are likely to be over time. Finally, if you have a choice pick a mutual insurer over a shareholder-owned stock insurer. Why pick a mutual?..."

 

[Independent]

Essentially I took what was in the NYLife illustration and here are the numbers they provided.

Female, 54, retire at the end of 11 years, 10k a year for 10 years, with annual longevity income of $8,540.

I assume 01/01/2013 is year 12, where she begins collecting her income and I am assuming is a lump sum payment at the beg of year.

So I went to ImmediateAnnuity.com to see how much it will cost to buy an annuity paying 8,540 and it comes up around 148,776, and this is with cash payment option. But keep in mind the illustration is over 1.5 years old and rates have gone down a lot since then. So I took a 10% discount to factor that in and the drops to 133,898.

I used this plus the 10k annual investment and plugged into excel and figured out the IRR is around 4.46%.

Now 4.46% today may sound high but back in 2002 T-Notes were yielding mid 4% and TIPS were yielding real yield of around 2%. You could have invested conservatively in Vanguard Wellesley and wind up with 20% more than what was needed to buy the SPIA.

While my method may not be perfect but it gives me an idea if it is worth committing a large sum each year for the next X years for this product.

Thanks. I was looking for numbers on their website, but didn't see any the first time I looked. You prompted me to search for "brochure", and I think I found the same thing you did.

There's a definition thing here. I think of the first two examples as somewhere between traditional SPIAs and "longevity insurance", the deferral periods are short and the ages are "young" for retirees.

Their third example is more like the situation I imagine. 65 year-old pays $100k premium and gets $67k per year, starting 20 years from now, only if he lives for 20 years. Those numbers were available on 6/3/2011, so I'd have to look at 20+ year bonds available on that date (30 year treasuries were 4.22%).

According to the SS actuaries, life expectancy for that guy at age 85 might be 6 years, so if he lives he might collect $400k on his original $100k, for a 7.1% IRR only if he lives.
But, he's got a better than 50% chance of dying in those 20 years, and then he gets nothing, and that's where the "insurance" aspect comes in.

And, then there's inflation...

 

[Gill]

The Hartford is another company offering a longevity annuity policy. I recently reviewed the rates of Hartford and the other companies mentioned in this thread and found Hartford to be the most favorable. I believe my agent also mentioned another company, so there are a number of them in the business.
Bruce

 

[bmcgonig]

I got a quote recently for NY life. I'm 56 and was considering buying an annuity that would start paying when I'm 70. Also I would defer SS until then. So my plan was to try to cover all my post 70 expenses with the combo. Then the rest of my money would cover from when I retire (v soon I hope) to age 70. Max 13-14 years.

What I really like about the idea is that I believe that I solve the problem of running out of money. It's also like a two bucket strategy, one for pre 70 and one post.

The quote I got was for 300k put down now, paying off in 2026. It was a 3% cola annual adjustment. 2800 per month. Not great so I figured I'd wait for a couple of years to see if interest rates rise. I'd like the combo of SS and the annuity to give me around 70k cola. That should be comfortable, I think. Any investments would be gravy.

Would appreciate criticism or ideas of a better way

 

[Gill]

The quote I got was for 300k put down now, paying off in 2026. It was a 3% cola annual adjustment. 2800 per month. Not great so I figured I'd wait for a couple of years to see if interest rates rise.

Keep in mind that, as the interval decreases between purchase and beginning of the payments, the premium will naturally rise because the insurance company has the use of your money for a shorter period of time. This could well more than offset any increase in interest rates during the next few years.
Bruce

 

[Dawg52]

Keep in mind that, as the interval decreases between purchase and beginning of the payments, the premium will naturally rise because the insurance company has the use of your money for a shorter period of time. This could well more than offset any increase in interest rates during the next few years.
Bruce

That's the thing, how much will rates have to rise to make it wise to wait? A couple of weeks ago I had my Fidelity rep work up a quote for a deferred income annuity to begin in 7.5 years. His quote was with NY Life, no cola or life beneficiary. No dependents so no need to buy the insurance imo.

I ran some numbers similar to hlfo718 illustration and found I would need to earn 4.6% return on my money for the next 7.5 years in order to buy a SPIA giving me the same monthly annuity checks. On the surface might not sound like a bad deal to buy now. Not easy finding a safe return earning 4.6%. But I'm going to wait. I have some Penfed CD's yielding 5% that will mature at around the time that I had earmarked for a SPIA. If rates go up, I should get a bigger bang for my buck. If not, I probably won't be any worse off waiting. And I might just decide to keep on trucking as is. Live off dividends and interest along with SS at that time.

 

[Independent]

I got a quote recently for NY life. I'm 56 and was considering buying an annuity that would start paying when I'm 70. Also I would defer SS until then. So my plan was to try to cover all my post 70 expenses with the combo. Then the rest of my money would cover from when I retire (v soon I hope) to age 70. Max 13-14 years.

What I really like about the idea is that I believe that I solve the problem of running out of money. It's also like a two bucket strategy, one for pre 70 and one post.

The quote I got was for 300k put down now, paying off in 2026. It was a 3% cola annual adjustment. 2800 per month. Not great so I figured I'd wait for a couple of years to see if interest rates rise. I'd like the combo of SS and the annuity to give me around 70k cola. That should be comfortable, I think. Any investments would be gravy.

Would appreciate criticism or ideas of a better way

Note that if you plan to sell a bond fund to get the $300k, and interest rates rise between now and then, the market value of your bonds could go down - offsetting the better annuity premiums. How much depends on how the duration of the bond fund compares to the length of the bonds the insurance company will buy.

The advantage of an annuity over simply buying bonds yourself is that the insurance company uses some of the premium from the people who die "young" to make payments to people who die "old". But that leverage requires that I'm starting in a group of people with relatively high mortality rates. Obviously there are fewer deaths between 56 and 70 than between 65 and 79, or between 56 and 75 (for example). So there may not be enough mortality lift in your example to make an annuity worthwhile.

The insurance company also knows that people who buy income annuities tend to be healthier than the average person, and that's reflected in the rates.

So, although the theory appeals to me, the numbers don't always look good.

 

[bmcgonig]

I agree it's a trade off. One of the biggest questions in retirement planning is "how long will I live?" Buying an annuity takes that off the table. In theory I could run a 15 year Firecalc if I got the annuity. Rather than the 40 year that I would need to run ( or more since my mom is still alive and healthy at 95). With new technology etc., there's a chance that I last till I'm over 100. Frightening actually to have to try to plan for that long. There's a prudential retirement planning billboard here in the Bay Area that advertises "experts say that you should plan on living until you are 105...."