The Longevity Annuity

[chinaco]

All this talk about pensions, annuities, etc.

This topic has been discussed before. I found this Financial Analyst Journal (from CFA Institute) Paper on Longevity Annuities and thought I would post the link.


http://corp.financialengines.com/employer/FE-LongevityAnnuity-FAJ-08.pdf


The author describes this type of deferred annuity as insurance against longevity. He uses a property and casualty insurance example. Insure your house with a lower premium (compared to the value of the house). If your house burns down, you get paid... if not your benefit was risk mitigation.... you did not need to keep reserves for the entire cost of your house to rebuild it just in case it burned down. For this type of deferred annuity, if you make it to the specified age... you get the annuity income, if not you die before that you get nothing. The stated benefit is that since you would have an old age income safety net... you can freeing up more savings to spend today with the net result of a higher spending level compared to funding retirement with bonds.

The author does describe some basic situations and circumstances where this approach might be an attractive income funding tool or where some would avoid it.

It is an interesting concept... the survivors in the money pool leverage the assets of the people that die early. Both groups (survivors/winners and deceased/losers) have the old age income safety net to feel more secure spending more of their money (savings).

I presents an interesting thought on immediate annuities vs longevity annuities in Figure 2.


Good idea, bad idea... you decide.

 

[bamsphd]

Good idea, bad idea... you decide.

Good idea. Whether it is a good buy though depends heavily on the price. The insurer takes on a lot of risk that longevity will change (think cure for cancer, etc) during the decades involved.

I wish we could setup a mutual system where a large group of people pooled their money, invested in something like a Vanguard Total Stock Market Index, then those who lived to say 90 years old split the pot. Unfortunately, I think I read years ago on this forum that such an arrangement is illegal in the US.

 

[FinanceDude]

Actually this very kind of insurance existed in the USA before 1930 I think..........

 

[chinaco]

Here is MetLife's Educational Brochure (and sales pitch).

http://www.metlife.com/assets/investments/products/annuities/Longevity-income-guarantee.pdf

 

[chinaco]

Actually this very kind of insurance existed in the USA before 1930 I think..........

It walks and quacks like a deferred fixed annuity.

But they have spruced it up with new riders to add some flexibility, death benefit (return of money), Access the money early for an emergency, etc.

Of course, those riders add to the cost. One would need to analyze each rider (and their situation) to determine if it really is a good idea for them.

Good idea. Whether it is a good buy though depends heavily on the price....

Yes and with high grade long-term bond rates where they are today... And for those who might entertain the idea, it might be a good idea to defer buying the deferred annuity!

 

[samclem]

I wish we could setup a mutual system where a large group of people pooled their money, invested in something like a Vanguard Total Stock Market Index, then those who lived to say 90 years old split the pot. Unfortunately, I think I read years ago on this forum that such an arrangement is illegal in the US.

Yes, we discussed it, but I can't find the thread. Brewer gave some history on the concept, along with the name. It was big in (Italy?) but there were problems with people gaming the system.
Anyway, as a way to insure against longevity risk it would solve a lot of problems at low cost. I'm not sure, though, if it's a good idea that everyone in the "pool" knows the identity of others in the pool, as this could lead to "longevity risk" of a different kind.

 

[Independent]

I wish we could setup a mutual system where a large group of people pooled their money, invested in something like a Vanguard Total Stock Market Index, then those who lived to say 90 years old split the pot. Unfortunately, I think I read years ago on this forum that such an arrangement is illegal in the US.

I've heard that tontines are illegal in the US. A quick Google search shows a number of comments like that, but I can't find a good reference to a statute. They were popular in the 19th century but subject to scams. It's difficult to figure out where to draw the line because any life annuity operates like a series of partial tontines. It's possible that only the extreme form where there is no payout until there is only one remaining participant is illegal.

It's certainly true that the longevity insurance in the OP is legal - it's a "Type A" annuity in the Standard Nonforfeiture law for annuities. In fact, in the early 20th century deferred annuities were sold with an emphasis on the monthly payout, not on the surrender values (even when they had surrender values).

 

[Gone4Good]

It was big in (Italy?) but there were problems with people gaming the system.

You mean, like, in a Dead Pool kind of way.