Longevity insurance promising – but higher rates would help
The Treasury Department and the Internal Revenue Service like it, as do many estate-planning experts. Now all…
The Treasury Department and the Internal Revenue Service like it, as do many estate-planning experts.
Now all that is needed for longevity insurance to grow from its tiny sales base is for more financial advisers to warm to the product: deferred-income fixed annuities.
Although they account for less than 5% of all income annuity purchases, according to Judith Alexander, marketing director at Beacon Research Publications Inc., deferred-income annuities could get a boost from recent government proposals that would make it easier for retirement plan participants to annuitize a part of their savings before retirement.
The product is relatively simple: a pre-retiree at, say, 65 buys an annuity that starts paying income for life starting at 80, 85 or some other age that the buyer selects.
Deferred annuities are cheaper than their immediate-annuity counterparts because payments begin so far in the future, permitting insurers to fund the longer-dated liability with longer-dated, higher-yielding assets, said Matt Grove, a vice president at New York Life Insurance Co.
Further, there is a mortality pooling advantage in that shorter-lived customers help subsidize the payments to longer-living clients.
Providers include The Hartford Financial Services Group Inc., MetLife Inc., Symetra Life Insurance Co. and New York Life, which recently announced that its Guaranteed Future Income Annuity has had $230 million in sales since it was launched in July.
Although many advisers contend that there is a place for these annuities in clients’ portfolios, the factors dampening sales of other fixed annuities — low interest rates and investor reluctance to part with a big chunk of savings to “buy” income — affect deferred-income annuities, as well.
“When clients buy longevity insurance in a low-rate environment, it’s harder for the insurer to make the pricing attractive,” said Steve Schreiber, a consulting actuary with Milliman Inc. “It’s a good product, but it’s really hard to sell it at this interest rate.”
Still, longevity insurance has a place alongside a portfolio of investments that a client will use for systematic withdrawals, said Stephen Esposito, a financial adviser at Macro Consulting Group LLC.
He said that a portfolio can be created to provide income for the first 20 years of retirement, after which the insurance kicks in.
Mr. Esposito warned that this strategy works best when the longevity insurance benefits from higher interest rates.
Low rates require investors to contribute more money upfront in order to get the same stream of income, he said.
“With rates where they are now, we’d want something that allows access to principal and strong cash flow,” Mr. Esposito said.
OUTLIVING WEALTH
New riders to the product, including death benefits and return of premium to heirs, have made the product more desirable for those who who seek financial confidence and fret about outliving their money, said Mitchell Kauffman, an adviser with Kauffman Wealth Management, which is affiliated with Raymond James Financial Services.
“It appeals to clients with a family history of longevity and meets an emotional need,” he said.
Aside from its straightforward use to provide income, the product can be helpful in certain estate-planning situations.
In cases involving multigenerational trusts — where wealthy older clients establish a trust for an adult child so as to remove assets from adult child’s estate — longevity insurance on the life of the adult child (with the grandchildren as beneficiaries) could protect against the risk of the adult child’s living too long and using up funds intended for the grandchildren, according to Andrew Gespass, a partner at K&L Gates LLP.
“What these beneficiaries get depends on how long someone else lives, and if that person lives to a very old age, then the beneficiaries won’t get nearly as much out of the trust as they would expect,” he said.
Also, a small-business owner can use longevity insurance to help fund life insurance premiums in an irrevocable life insurance trust.
In this scenario, the client may want to exclude a $20 million small business from his or her estate for estate tax purposes, so he or she will buy a $20 million life insurance policy and place it in an irrevocable life insurance trust.
If the business owner lives to old age, longevity insurance payments can cover the cost of insurance premiums, Mr. Gespass said.
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