Longevity insurance

[Kronk]

My mother has a financial planner; I'm reviewing some of his recommendations now. One of which is longevity insurance.

$30,000 bought at age 65.
At age 80, income is $524/month NOT inflation adjusted
OR
At age 85, income is $771/month NOT inflation adjusted

Both of these numbers have a "10 year guarantee" if she dies during payout. If she dies prior to the start of the annuitized stream, the $30k is returned at 3% per year compounding.

$30k is not a huge part of her portfolio, and the vast majority of her income needs will be met between pension and SS, so she isn't looking at much of a yearly drawdown of her portfolio. I'm leaning towards advising her to do this (the age 80 version). This might not be the greatest "investment", but as an insurance product that adds some money down the line it probably suits her needs.

Anyone have any thoughts on the matter?

 

[Notmuchlonger]

I feel insurance is best left for catastrophic things. This type of insurance product doesn't fit into that category to me.

 

[Rich_by_the_Bay]

If she is very concerned about outliving her money, why not consider a fixed single premium annuity? It's a terrible investment from a growth or income standpoint, but it will last her lifetime, she will start getting payments right away (if she doesn't need them, save them for future SPIAs to keep up with inflation).

It seems like a much more straightforward, tried and true product.

 

[FinanceDude]

My mother has a financial planner; I'm reviewing some of his recommendations now. One of which is longevity insurance.

$30,000 bought at age 65.
At age 80, income is $524/month NOT inflation adjusted
OR
At age 85, income is $771/month NOT inflation adjusted

Both of these numbers have a "10 year guarantee" if she dies during payout. If she dies prior to the start of the annuitized stream, the $30k is returned at 3% per year compounding.

$30k is not a huge part of her portfolio, and the vast majority of her income needs will be met between pension and SS, so she isn't looking at much of a yearly drawdown of her portfolio. I'm leaning towards advising her to do this (the age 80 version). This might not be the greatest "investment", but as an insurance product that adds some money down the line it probably suits her needs.

Anyone have any thoughts on the matter?

It is probably unnecessary. Does she have to wait 15 years to turn on the guaranteed payments?

 

[Kronk]

I feel insurance is best left for catastrophic things. This type of insurance product doesn't fit into that category to me.

Probably not, unless she lives to 120... that might be catastrophic for her portfolio.

If she is very concerned about outliving her money, why not consider a fixed single premium annuity? It's a terrible investment from a growth or income standpoint, but it will last her lifetime, she will start getting payments right away (if she doesn't need them, save them for future SPIAs to keep up with inflation).

It seems like a much more straightforward, tried and true product.

Certainly a reasonable approach, though to approach the $500/month at age 80, she'd probably have to devote a much more significant part of her portfolio.

It is probably unnecessary. Does she have to wait 15 years to turn on the guaranteed payments?

With this product, she could probably get a $350/month payment at age 75, or a $220 or so payment at age 70. Again, none of that is inflation-adjusted. Or she could ditch the 10-year-income guarantee and get $1100 at age 85 or $635 at age 80.

 

[Nords]

Probably not, unless she lives to 120... that might be catastrophic for her portfolio.

To say nothing of the effect it'd have on your portfolio.

You might already be on this, but has she considered delaying SS until she's age 70 and receiving the maximum amount? That's as cheap as COLA'd annuities can be, but to get that longevity insurance she has to risk the uncertainty of living long enough for breakeven.

 

[ziggy29]

Another thing to consider here: How is her health, and how's the family history for longevity?

 

[Kronk]

To say nothing of the effect it'd have on your portfolio.

You might already be on this, but has she considered delaying SS until she's age 70 and receiving the maximum amount? That's as cheap as COLA'd annuities can be, but to get that longevity insurance she has to risk the uncertainty of living long enough for breakeven.

Yes, I've been thinking that might be a very good option for her. I played around with a spreadsheet and it looked like taking SS at 68 is better overall unless she lives past 80. The longevity insurance option overtakes SS taken at 68 at around age 84. The longevity insurance option overtakes the SS taken at 70 at around age 88. Doing both SS at 70 and the insurance trumps either one by itself beginning at around age 85.

So, presuming I didn't frak up the spreadsheet, it looks like it'd be doing what it is designed to do.

Another thing to consider here: How is her health, and how's the family history for longevity?

Her health isn't great; diabetes, high blood pressure. Her dad lived to nearly 90, though, and her mom into her very late 70's I believe.

She's also got LTC insurance. She watched her dad chew through his savings in a nursing home, and feels better paying the premiums for that.

 

[Dennis]

all good answers to consider.. Ans as Ziggy says? How's the health issue? Odds of a Woman living till 80 is about 50% while to 85 is even slimmer..I think the last nat'l ave was 76 for men and 78-80 for Women? Ask others on that one..

Insurance Plans Plays the odds ( in their Favor) who gets The $ if she dies beforehand? How much does it grow in the meantime? Compare to Gen. Bond Fund like VBMFX adn go to Vanguard> Annuities and talk to them..
at age 65 with $30k, ave 6% apy, using the rule of 72, it doubles in 12 hrs, probably be worth about $70,000 by age 85..taking out $7k yr and bal. grows at that 6%? , your taking out a 4% WD and that could last for another 25 yrs..

And you can bet that FP? Ask if he has a Life Insurance lic. in the state? Then he'll probably get a nice 10% commission and probably 1% yr after that on it..
http://socialize.morningstar.com/NewSocialize/asp/AllConv.asp?forumId=F100000015
I'd Go to the M* Vanguard Mess. Board and ask them..@ Vanguard Diehards Discussion Board and @ Bogleheads Investing Advice and Info
and ask> Invest with Edelman | Ric Edelman
and then > Ask Scott Burns> Asset builder

just to get somemore opinions of course..

 

[bongo2]

The point of this cover would be to insure that your mother has money to spend after age 85. Both the 10 year guarantee and the return-of-premium guarantee are contrary to that goal, so if you want to pursue somthing like that you should do it without those gimmicks.

A big problem with financial planners and insurance is that the commissions on insurance are sometimes many many times higher than the commissions on regular assets. This doesn't mean that they are always bad, but it does mean you have to be careful.

 

[Independent]

Yes, I've been thinking that might be a very good option for her. I played around with a spreadsheet and it looked like taking SS at 68 is better overall unless she lives past 80. The longevity insurance option overtakes SS taken at 68 at around age 84. The longevity insurance option overtakes the SS taken at 70 at around age 88. Doing both SS at 70 and the insurance trumps either one by itself beginning at around age 85.

So, presuming I didn't frak up the spreadsheet, it looks like it'd be doing what it is designed to do.

I'm not sure what calculation you did. I just accumulated the costs/benefits at (CPI+2.5%) to look for the age when the accumulated benefits exceeded the accumulated costs (i.e. when the annuity beats TIPS). If I assume CPI=0, I get numbers kind of like yours, but if I put in CPI=3% I get a significant advantage for deferring SS.

 

[Kronk]

I'm not sure what calculation you did. I just accumulated the costs/benefits at (CPI+2.5%) to look for the age when the accumulated benefits exceeded the accumulated costs (i.e. when the annuity beats TIPS). If I assume CPI=0, I get numbers kind of like yours, but if I put in CPI=3% I get a significant advantage for deferring SS.

One of my simplifying assumptions was that the alternative to the annuity was a return that basically just matched inflation (which I played around at 3-5%). That's probably where we diverge. A 2.5% real growth would definitely point more to deferring SS and leaving a longevity product alone.

Here's another twist to the portfolio... From what I understand, her pensions grow at a fixed 2%. The pensions will start around 50% higher than SS benefits. So her overall portfolio is probably more at risk from high inflation than most. Any specific strategies to attempt to combat that?

 

[Independent]

If she has any growth in her private pension she is better protected than most people. There are a few threads around on investing in an inflationary environment - people favor commodities, real estate, and TIPS. If she owns a house, she already has real estate and is avoiding most of the risk of rents going up. I used 2.5% + CPI for my calculation because that's a typical guess for TIPS yields. If she's looking for something very simple, Vanguard has a TIPS fund - she would still have some risk from price flutuations and from the CPI not being equal to her personal inflation rate. She'd also have to look at the tax situation.

 

[Rambler]

She could put the 30 in a 5% muni, reinvesting the interest, start drawing at 80 and the money would last until age 92, If she started the draw at 85, it would last until age 94. If she needed the money earlier, or felt her demise was going to be earlier, then she could always sell the bonds and use the proceeds. I would probably do something more along those lines...why pay am insuarance agent a huge commission? ...but that's just me.

R

 

[MasterBlaster]

I don't agree with most of the posts here that longevity insurance is necessarily a bad thing.. For those with a better investment scheme, please talk to the risk(s) involved. Longevity insurance gives more certainty to your portfolio and how much you could spend every year. It just may be that an approach like this allows you to spend more money before your demise than holding back a large percentage cause you just don't know how long to plan for. The unfortunate truth, is that many of us will die with substantial portfolios having foregone the best-use of such. On the other hand, If you plan poorly and live longer than your money, you just may be hurtin'. Remember that half the population lives longer than the median.

As always of course there are exceptions to this guidance.

The way I understand it, one can put maybe 10-15 percent of your portfolio in one of those (inflation protected longevity) policies and then spend down your remaining portfolio to zero before hitting the age threshold.

Now, whether or not a $30k policy with this financial planner with indicated insurance company is a rip-off is unclear. More details are needed.

Here is an article that Business Week published on this topic:

http://www.businessweek.com/magazine/content/09_15/b4126058316998.htm

 

[FUEGO]

From the literature, the longevity insurance benefits don't start to accrue enough to offset expenses until age 65-70. By age 80, the longevity insurance can allow you to take a few percent or more additional withdrawals above what an amortized payout scheme would allow.

Think about it this way: in any given year, the chance of a person in the pool of insured dying at age 65 is much less than the chance of one dying at age 80. So the later you wait past age 65 to annuitize, the more benefit you get out of longevity type insurance.

If the goal is strictly longevity insurance, strip out any extra riders such as 10 year guaranteed payout, etc. and either pocket the principal savings or increase the payout.

 

[MasterBlaster]

Fuego:

Are we talking about the same thing ?

In my book, Longevity insurance is for people who have really lived a long time. It doesn't kick in until age 80-85 (ever).

We aren't confusing a variable annuity that is being annuitized are we ?

 

[FUEGO]

Fuego:

Are we talking about the same thing ?

In my book, Longevity insurance is for people who have really lived a long time. It doesn't kick in until age 80-85 (ever).

We aren't confusing a variable annuity that is being annuitized are we ?

I was referring to a regular annuity that could be annuitized in the future at a given age (say, 80) that would pay equal payments or inflation adjusted payments from the age of annuitization until death. Definitely not a variable annuity.

My point is that annuitizing at age 65 doesn't give you a much higher cash flow due to mortality of others' in the insurance pool dying. Whereas, by age 80, the mortality rate of individuals in the risk pool is sufficiently large that you add a few percentage points (or 10% or more depending on age) to the return you get from an annuity.

What are the specific features of the "longevity insurance" you are describing? I'm quite the opposite of an expert on this, so I may be confusing things (but I'm interested in learning more about the mechanics of these products).

 

[Kronk]

Thanks for the article, MasterBlaster.

Just to be clear, the annuity being discussed here is a lump sum paid at age 65, which results in a monthly payment beginning at age 80 or 85. Just a single premium deferred fixed annuity.

I'm still on the fence about this one. Glad this is generating a few additional comments. In my mom's case, she isn't a particularly savvy investor, so a simple product like this might make sense. I'm not concerned about the fees, because I can just evaluate the bottom line, which is how much now for how much later. If it makes sense, I don't care that the planner is getting a commission.

Now, one interesting thing is stripping out the guarantees. Here are some figures with and without guarantees:

1. Payout begins at age 80:
guarantee: $524/mo
w/o guarantee: $635/mo

2. Payout begins at age 85:
guarantee: $771/mo
w/o guarantee: $1117/mo

 

[FUEGO]

Thanks for the article, MasterBlaster.

Just to be clear, the annuity being discussed here is a lump sum paid at age 65, which results in a monthly payment beginning at age 80 or 85. Just a single premium deferred fixed annuity.

1. Payout begins at age 80:
guarantee: $524/mo
w/o guarantee: $635/mo

2. Payout begins at age 85:
guarantee: $771/mo
w/o guarantee: $1117/mo

Single Premium Deferred Annuity - that is what I was referring to. It can actually provide a significant increase in spending when annuitized at age 80+. The purpose of this product should be to provide lifetime income and insurance against outliving your money (ie longevity insurance). As expected, the older you get when it is annuitized, the more the 10 yr min payout guarantee costs you.

You should also shop this type of product with some other providers in order to ensure you are getting the best pricing, but also to make sure you are getting insurance from one of the most financially sound annuity sellers.

 

[Independent]

I was referring to a regular annuity that could be annuitized in the future at a given age (say, 80) that would pay equal payments or inflation adjusted payments from the age of annuitization until death. Definitely not a variable annuity.

My point is that annuitizing at age 65 doesn't give you a much higher cash flow due to mortality of others' in the insurance pool dying. Whereas, by age 80, the mortality rate of individuals in the risk pool is sufficiently large that you add a few percentage points (or 10% or more depending on age) to the return you get from an annuity.

What are the specific features of the "longevity insurance" you are describing? I'm quite the opposite of an expert on this, so I may be confusing things (but I'm interested in learning more about the mechanics of these products).

To me, the key difference between a "regular SPDA" and these newer products is surrender values before the monthly income begins.

If you buy at 65 intending to take a monthly income at 85, but have the right to surrender for most of your premium before then, you have a regular SPDA. If you can't get any money out without living to 85, and then the only payout is a monthly income, that's an unusual product that some people call "longevity insurance".

There are features that can blur the difference. It sounds like Kronk's could be purchased with a death benefit if you die before the monthly income begins, but no payout for a voluntary surrender.

I agree with the article that the logical use of the no-surrender-value version is to use a small percent of your assets to guarantee a monthly income if you happen to live a long time, but then maintain control over the bulk of your assets, knowing that you can spend principal from them because you've got the back end covered. If I were buying something like this, I wouldn't want the death benefit rider.

 

[Kronk]

If anyone is interested, mom has decided to take a pass on this at this time. She doesn't have a good feel for her monthly expenses, since she doesn't currently own a house and has some of her housing expenses paid for her (she currently lives in a parsonage). She's planning on paying cash for a house within the next three years, and her portfolio is fine even with that chunk put into a house.

Anyhow, her life goals are to do more travelling (Alaskan cruise, Volga cruise, Israel, Scotland). She's very frugal from many years of practice, and I don't think she'll have trouble meeting expenses. Tying up current money for a future income stream doesn't seem to fit her goals.

That said, we'll keep the option open for taking SS at 70 instead of 68 (or taking it at 68 and paying it back if desired). We'll also keep the longevity insurance under consideration. The more I think about it, the more the death benefit really does nerf the whole concept. If she were going to do it, I'm now thinking that the age 85 option with no death benefit might be the best option. But maybe by hedging the bet and only dropping 15k into it for $550/mo at age 85.

Thanks for the comments.

 

[FUEGO]

I agree with the article that the logical use of the no-surrender-value version is to use a small percent of your assets to guarantee a monthly income if you happen to live a long time, but then maintain control over the bulk of your assets, knowing that you can spend principal from them because you've got the back end covered. If I were buying something like this, I wouldn't want the death benefit rider.

This is basically what I'm talking about making sense for many people (one of the few annuity type investments that may actually make sense in fact).

It allows one to maximize lifetime spending. Here's an idea of the way it would work: Take a few percent of your portfolio (or even 5-10 percent), buy a single premium deferred annuity at age 55 that starts paying at age 85 in an amount sufficient to cover most of your expenses after SS payments. Then ER at 55, and spend essentially your whole remaining portfolio in the next 30 years. At age 85, if you make it that long, the SPDA kicks in and that plus your SS would be sufficient to live on (theoretically speaking).

Nice little plan, and it might allow you to take 3.6% SWR (ie 4% of 90% of your portfolio after you buy the SPDA) versus closer to 3% if you ER at 55 and plan on a 40-50 year retirement period.