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Great ExpectationsGood news: People are living longer. Bad news: Many may outlive their nest eggs. Is longevity insurance the solution?Life expectancy is at an all-time high of 78.1 years. However, economic trouble is brewing: Many people may run out of money in retirement. While longevity is increasing, the overall U.S. population is also skewing older. The first wave of an estimated 77 million baby boomers--a group comprising about a quarter of the U.S. population--is now entering retirement, according to the Census Bureau. Perhaps most telling, by 2050 an estimated 21 million Americans are projected to be 85 or older. That would represent a four-fold increase from the 5.3 million people in this age group in 2006. This, combined with poorly funded personal savings, a decline in traditional pensions and the uncertain future of Social Security, means clients are demanding guarantees that their money won't run out. As a result, immediate annuities, variable products with a myriad of living benefit guarantees, and everything in between have been packaged and repackaged to appeal to an aging customer base. One emerging solution is longevity insurance, which enables clients who expect to live past their late 80s to use a small portion of current savings to buy income for their later years of retirement. How much of a client's savings is typically required? Usually 10% to 15%, depending on age and deferral period, is needed to buy--with today's dollars--a fixed future income stream. The client selects a date to begin collecting income, based on family history and financial needs. Once the payouts begin, they provide payments for the rest of the client's life. And until that age, the client retains total, unrestricted control of the rest of his or her retirement portfolio. Life insurance, of course, provides a death benefit only if the person dies during the coverage period. Longevity insurance provides benefits only if the person reaches the age they've specified to begin payments. If the retiree dies before their income stream kicks in, the premium paid is lost. The product is essentially protection against the financial risk of living too long, rather than dying too young. For this reason, clients who do not expect to live long should not buy longevity insurance, and should stay away from variable annuity living benefit riders or immediate annuities as well. Like most insurance products, options are available to customize these policies to meet clients' needs. Death benefit options can ensure that heirs receive a predetermined portion of the purchase payment, and annual payment-increase options can help counter the effects of inflation and rising health care costs. A period-certain rider even provides guaranteed payments to cover planned costs, such as remaining mortgage payments. The Long Road Determining how long a client's retirement savings should last is one of the most difficult aspects of financial planning. Consider the difference when accumulating savings for retirement as compared with withdrawing those savings while in retirement. In the accumulation phase, the target date for saving is generally age 65. While saving for retirement, investors run projections and adjust asset allocations geared toward this age. They may not know precisely when they will retire, but age 65 is the most common default. Once retired, however, clients no longer aim for a de facto target age. People do not know how long their savings must last. This often leads them to be too conservative in spending the money they have. In addition, many financial plans only take into account a median life expectancy. Remember, this means that half the population will live beyond this median age. It is not uncommon for a retiree to begin taking distributions in the first year of retirement, age 66, and then discover that the money will be gone at age 86--roughly the life expectancy of today's 65 year-old retiree. Longevity insurance removes the difficult question "How long should my money last?" by providing a finite time to plan around. Customers can then allocate the rest of their retirement portfolio to providing income until their longevity insurance kicks in. This way, clients have time to assess their risk-versus-return situation and decide if they should be more aggressive investors in their early retirement years. It also shortens the period of time that assets would be exposed to market volatility. True, immediate annuities provide a time frame to plan around, but longevity insurance's advantage is its cost-effectiveness. Similarly, a guaranteed lifetime withdrawal benefit in a variable annuity can help remove some of the guesswork in financial planning. However, unlike a GLWB, longevity insurance is portable and does not force the client to remain in one variable annuity contract to get the guarantee, which is particularly attractive during a financial crisis. Longevity insurance also is less expense than a GLWB. Guaranteed lifetime withdrawal benefits have rider fees that often must be paid for more than 20 years of retirement. Baby boomers often find the freedom afforded by longevity insurance to be particularly inviting. These modern retirees-to-be want the financial independence to make the most out of their golden years. An AARP report on aging found that 72% of boomers plan to spend more time on interests and hobbies when they retiree. Fifty-seven percent said they wanted to do more traveling, while 47% wanted to do more volunteer work. Longevity insurance empowers boomers to more fully enjoy their active years without the worry of jeopardizing financial security later in life. In addition, as retirees age their spending begins to go down. In fact, from age 55 to 75, average annual expenditures drop 46%, according to the Bureau of Labor Statistics. A longevity product, therefore, would give them more money in their early retirement years--when they need it the most. By Richard J. Lindsay (Contributor Richard J. Lindsay is senior vice president of the life and annuities division at Symetra Life Insurance Co. He may be reached at invest@symetra.com.)
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