Longevity Insurance: Good for the Long Run

One of the largest risks in retirement is living too long.

Although this may seem like good news, the truth is many retirees will not have enough money to last them through retirement.

This is why MetLife started offering Longevity Income Guarantee, or longevity insurance, in 2007, a type of annuity that offers a lifetime guarantee of income. Other insurance companies, such as Harford Financial, do as well.

Yet sales of longevity insurance have been very slow, Bennett Kleinberg, a vice president and actuary in MetLife’s retirement products group, said, because people tend to underestimate how long they can live and whether they can live on the traditional 4% of assets that is suggested in retirement. “They don’t have enough appreciation of what kind of risk that is,” he said.

Last year changed everything though. The financial crisis boosted sales of longevity insurance substantially, as worries about financial stability mounted. This has led more individuals to talk to advisors about options for generating income to last through their lifetimes.

Nevertheless, at the LIMRA retirement industry conference in Washington last month, the statistics were frightening: Only one in six retirees have a written retirement plan and nearly half of all pre-retirees plan to work in retirement. But the reality is that 56% of individuals retired earlier than they had planned. In addition, pre-retirees underestimate longevity risk, placing health care, inflation and volatility risks higher when asked to list them in order of relative importance.

One of the challenges individuals have in planning for retirement is they don’t know how long they will live, Kleinberg said. “It could be five years or 45 years.”

A client that is 65 and in good health can buy longevity insurance today, which will kick in when they turn 85, and provide a monthly payment for the rest of their life. Although, Kleinberg said, the product is not appropriate for a significant portion of any individual’s assets, it can be an essential part of a retirement portfolio. “As we know from the economic crisis, when investments are made poorly, the level of income one can take in retirement can drop as well,” he said. “It’s most helpful to look at longevity insurance in an insurance context as opposed to an investment context. It provides insurance against you living too long. The other side is you don’t have as much liquidity as in a traditional investment.”

There are two types of longevity insurance, Kleinberg explained: The first is a flexible product where individuals can start income anytime after two years from the time of purchase up until age 85. There are death benefits and the insurance can be cancelled at any time as long as payments haven’t started and the money will be returned with an adjustment for interest rates.

The second product is the max, which provides a maximum level of income, but only starts paying out when an individual turns 85. There are no cancellations allowed and no death benefits, but it provides the highest level of income.

For example, a male age 65, who wants to start receiving payments at 85 and invests $100,000 under the flexible version will get $40,000 per year after age 85, Kleinberg said. With the max version that same man will get $70,000 per year after 85 (but nothing if he dies before 85.)

How can insurers offer so much? They are betting a substantial number of policyholders won’t live until 85 and therefore won’t be able to collect. And the policyholders money is tied down during the 20 years between 65 and 85 when they are ready to start receiving payments. Another downside to the policyholder is that their heirs cannot collect a dime if the policyholder dies before they begin to collect.

But as an insurance policy longevity insurance guarantees that if the individual lives to 97 they will do so with a safety net in place.