IN THIS
ISSUE
P. 3 A Dream Deferred:
Longevity Insurance as a
New Retirement Option
P. 4 Asia Pacific—
P. 7 The Asset Managers
Coming of Age
P. 9
President’s Message
Leadership Committee:
Leading Change in the
Industry
A Dream Deferred: Longevity Insurance as a
New Retirement Option
BY ROB STONE
Longevity insurance can essentially
remove the “How long will I live?” question from the retirement planning
process. The basic premise is that a significant amount of leverage can be
gained from using a small percentage of assets to buy
deferred income at a future
age. This leverage is created
by a combination of mortality and interest discount from
the time of purchase to the
start of income. When
designed with no death or
surrender benefit (i.e., the
only benefit is the deferred income), all
premiums are used to fund benefits for
those surviving to the income deferral
age, thus maximizing the insurance
value of the product.1
The pure insurance aspect of this coverage is appealing, both from a conceptual
and a cost standpoint. The word from the
marketplace, however, is that this appeal
is recognized mostly by economists and
actuaries. New products are being introduced, but (anecdotally) sales have not
taken off in existing offerings. Is this a
product whose time hasn’t yet come, but
which will catch on as the retirement
market continues to shift into high gear?
Or is this a case of good theory with no
application?
One downside of marketing a single
premium longevity product is the need
for a customer to part with a lump sum
August 2007
to purchase the coverage. While this
makes sense in situations where an individual has accrued substantial assets and
is making the switch from accumulation
to income, every customer may not wish
to part with 5-10% of a nest
egg in an instant for a benefit
that has been deferred years
into the future.
What if, however, the
deferred income could be purchased with multiple small
payments over time? This
would put premium payments
for longevity insurance on par
with budgeted payments for other types
of insurance: life, disability, health, and
long-term care. In theory, a person
would buy slices of deferred income
with each premium, larger slices for premiums paid when younger, and smaller
slices for payments made when closer to
the income starting date.
Running the numbers
Below is a chart of example incomes
purchased for a male with $360 annual
payments from age 25 through age 59, a
total expenditure of $12,600. All values
are derived from a sample pricing model
created by the author and should not be
construed as values fit for actual sale.
Shown are the payable incomes
deferred to various starting ages (i.e., all
purchased income slices from the 35
premium payments have been added
together for each deferral age).
A first reaction might be that the
income achieved at some of these ages
is quite modest, even keeping in mind
that the premium is only $360 per year.
In fact, the deferred incomes calculated
are quite sensitive to the underlying
mortality assumptions and the necessity to include mortality improvement.
Mortality improvement merely captures the fact that human mortality has
generally been decreasing over time.
This means an average 40-year-old
today would be assumed to experience
greater mortality than an average 40year-old 15 years from now. By extension, any one slice of income purchased
at age 25 assumes 40 years of this type
of mortality improvement by the time
income begins at age 65 (with additional mortality improvement thereafter). This means fewer people die
along the way (before and after commencement of the income), making
the projected incomes lower.
Stone, continued on page 6
Deferred Income Purchased With $360 Annual Premiums
From Issue Age 25 through Attained Age 59
Income Start Age
Annual Income
60
$2,523
65
$3,494
70
$5,032
75
$7,641
80
$12,457
85
$22,367
NAVA OUTLOOK 3
outlook
Plotnick, continued from page 5
and a greater appreciation of open
architecture and objective product
selection.
The push factors are potentially even
more powerful. An effective tie-up
between insurers and asset managers,
regardless whether these are domestic,
Addressable Insurance Assets, 2006
(US$ in billions)
233
193
150
119
92
Source: Cerulli Associates
Stone, continued from page 3
Another fact to consider is that the
goal of the consumer here is to lay off
longevity risk to the insurance company,
who is likewise being asked to project
longevity (not to mention interest rates)
far into the future. Over such a long time
horizon, a bit of conservatism in the
form of relatively low projected mortality rates and interest rates on the part of
the insurance company is prudent.
Succeeding in the marketplace
Prudence and conservatism are fine
topics of conversation, but where might
this product fit well in the marketplace?
Are tax-qualified defined contribution
plans a feasible home for these products?
What if a company offering a 401(k)
plan were to take a view that providing
a source of income for employees in the
future was important-but at the same
time wasn’t willing to offer a defined
benefit plan? An employer could, in
that instance, provide a premium equal
to a small percent of a participant’s
salary into a longevity insurance product on behalf of each employee. This
could, perhaps, be done in addition to
6 NAVA OUTLOOK
the normal match provided to
employee contributions.
Additionally, a longevity insurance
product could conceivably be an investment option for participant contributions
in a defined contribution plan. Whether
funded by the employer or participant,
however, special care must be taken with
longevity insurance inside qualified
plans. Any income deferred past age 70
1/2 could potentially create issues with
meeting the minimum required distribution rules. For that reason it may be easiest to make sure deferred income purchases inside a qualified plan begin paying income no later than age 70.
The lack of cash value or death benefit in these products is what helps provide the highest possible income at the
deferral age. It is important, then, for
plan participants to understand that
once allotted to the longevity insurance, the value of each contribution
isn’t accessible until the deferral age has
been reached and income begins. Over
time (and several job changes), the purchased slices of income remain in the
longevity insurance contract in which
they originated, waiting to convert to
foreign, or joint venture players, could
be a stunning boost to the region’s insurance industry based on meeting ever
more pressing retirement and protection needs via a set of well targeted
products and financial educational initiatives. In addition, a template already
exists for the development of the
mutual funds market in Asia.
Effectively, application in the life and
investment-linked insurance industry
could foster a wave of financial literacy
and interest that dwarfs anything seen
so far in the region.
Contributed by Lisa Plotnick, Associate
Director, Cerulli Associates and Shiv
Taneja, Managing Director, Cerulli
Associates. Ms. Plotnick can be reached at
[email protected]; Ms. Taneja can be
reached at [email protected].
deferred income at the appropriate age.
It will be interesting to watch the
longevity insurance market develop and
see how the product is applied in sales situations. It seems possible that longevity
insurance could fit into the qualified market, which today sees a steady diet of
defined contribution plans as a main
course and fewer defined benefit plans on
the side. With fewer and fewer retirement
plans creating incomes (rather than pots
of money) for participants, longevity
insurance could help bring income to the
forefront, even inside defined contribution plans. At a minimum, it would allow
plan participants to have a way to provide
a future income for themselves while also
positioning their assets to achieve optimal growth for their nest egg.
Contributed by Rob Stone, FSA, MAAA,
Consulting Actuary, Milliman, Inc. He can
be reached at [email protected].
1
The recent Outlook article “Longevity
Insurance: An Answer to a Difficult
Retirement Question” (December 2006)
provides a simple example of single premium
longevity insurance in which income is purchased at age 60 but deferred to age 85.
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