Longevity Insurance: An Answer to Your Clients’ Biggest Worry?

AP Photo/Wilfredo Lee AP Photo/Wilfredo Lee

Are your clients worried about outliving their income? Are they concerned about spending their retirement assets too early and spending their last years destitute? Enter longevity insurance.

As the name implies, longevity insurance is a contract designed to insure  the cost of an unexpectedly long life. The product has yet to make significant waves in the insurance industry, but rising life expectancies could position it as a key product for retirees who have enough assets to maintain their lifestyle through their expected life spans but might not have the income to support themselves if they live longer.

At its core, longevity insurance is a deferred annuity with a very late start date. The “insured” (really, “annuitant”) makes an immediate single premium payment. The contract does not make payments to the annuitant until he or she reaches a particular age—typically 85 years old. The contract then pays a fixed amount on a monthly basis for the remaining life of the annuitant.

Rates for longevity insurance are relatively low, due to the long deferral period and the probability that the annuitant won’t survive long enough for the annuity payments to begin. An article published last month provides rates for one carrier’s longevity insurance product. Under that company’s pricing, a man purchasing a policy at age 55, would receive more than $50,000 a year after age 85 for an initial premium outlay of $50,000. The same product, purchased five years later at 60 would pay only $38,000 a year, and $28,600 a year if purchased at 65. A woman can expect to receive significantly smaller payouts for an equivalent premium payment.

For clients who are staying up at night worrying about overspending their retirement assets, a longevity insurance policy may be a good deal at those rates, although the product can quickly lose its appeal when inflation is factored into its price. Also, current rates could rise due to current low interest rates.

Despite being an annuity at its core, longevity insurance is susceptible to the same risks as a life insurance policy because it requires substantial upfront payments and pays only after many years. Like life insurance, a longevity insurance policy’s viability depends on the insurer’s financial health. But unlike life insurance, where insureds and their advisors have hundreds of companies to choose from, only a few carriers currently offer longevity policies, reducing consumer choice and carrier competition. State guarantee funds do generally cover between $100,000 and $500,000 of present value in an annuity.

Longevity insurance is just a type of deferred annuity; but recasting the product as insurance has advantages. Everyone has an opinion about annuities. But “longevity insurance” is a relative unknown in the panoply of insurance products.

Unfounded resistance to annuities may not be a barrier to longevity insurance. Everyone can be educated to understand retirement income sufficiency risks, and without the baggage often accompanying annuities, longevity insurance may be an easier sell. Who wants to live off Social Security for 15 years if they make it to 100? For those who are worried that they’ll pay the premium and never receive a single payment , longevity insurance policies typically offer a rider that guarantees a return of principal or continued annuity payments to the annuitant’s beneficiaries.

For additional coverage of this issue and similar ones, we invite you to sign up with AdvisorOne’sSummit Business Media partner, AdvisorFX, for a free trial.

You may also be interested in signing up for a free trial with another Summit Business Media partner, Tax Facts Online.

See also The Law Professor's blog at AdvisorFYI.

About the Author
Robert Bloink

Robert Bloink

Robert Bloink worked to put in force in excess of $2B of death benefit for the insurance industry’s producers in the past five years. His insurance practice incorporates sophisticated wealth transfer techniques, as well as counseling institutions in the context of their insurance portfolios and other mortality based exposures. Robert Bloink is a professor of tax for the Graduate Program of International Tax and Financial Services, Thomas Jefferson School of Law.

Previously, Robert Bloink served as Senior Attorney in the IRS Office of Chief Counsel, Large and Mid-Sized Business Division, where he litigated many cases in the U.S. Tax Court, served as Liaison Counsel for the Offshore Compliance Technical Assistance Program, coordinated examination programs audit teams on the development of issues for large corporate taxpayers, and taught continuing education seminars to Senior Revenue Agents involved in Large Case Exams. In his governmental capacity, Mr. Bloink became recognized as an expert in the taxation of financial structured products and was responsible for the IRS’ first FSA addressing variable forward contracts. Mr. Bloink’s core competencies led to his involvement in prosecuting some of the biggest corporate tax shelters in the history or our country. He can be reached at rbloink@nationalunderwriteradvancedmarkets.com

About the Author
William H. Byrnes

William H. Byrnes

William Byrnes is the leader of Summit Business Media's Financial Advisory Publications, having been appointed July 1, 2010. He has been an author and editor of ten books and treatises and seventeen chapters for Lexis-Nexis, Wolters Kluwer, Thomson-Reuters, Oxford University Press, Edward Elgar, and Wilmington, as well as numerous commissioned, peer-reviewed, and law review articles. He was a Senior Manager, then Associate Director of international tax for Coopers and Lybrand, which subsequently amalgamated into PricewaterhouseCoopers, practicing in Africa, Europe, Asia, and the Caribbean.

He has been commissioned and consulted by a number of governments on their tax and fiscal policy from policy formation to regime impact. He has served as an operational board member for companies in several industries including fashion, durable medical equipment, office furniture, and technology. Since 1994, he has been a professional trainer for professional association conferences, government workshops, and financial service institutions in-house meetings.

Before Associate Dean Byrnes joined the administration of Thomas Jefferson School of Law, he was a tenured law faculty member at St. Thomas School of Law. He serves on the Academic Committee of the American Academy of Financial Management. He created the first online graduate program offered to wealth managers and life insurance producers without any legal background—see http://llmprogram.tjsl.edu (Graduate Program of International Tax and Financial Services, Thomas Jefferson School of Law).

Email: wbyrnes@nationalunderwriteradvancedmarkets.com

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