Longevity Protector™

Longevity ProtectorThe Longevity Protector™ Product is based on the Advanced-Life Delayed Annuity (ALDA) idea first articulated by Moshe Milevsky (see his paper) and will provide a hedge against inflation and longevity risks.  In an ALDA, a participant begins paying relatively small premiums at a young age (e.g. 30 – 50), and pays those premiums (adjusted for inflation) for decades.  At an advanced age (e.g. 75 – 90) the participant begins receiving income for life, also adjusted for inflation.  It is best thought of as the complement of term life insurance; term life pays the insured’s beneficiary only when the insured dies, while an ALDA product like Longevity Protector™ pays the insured when the insured lives (and the longer one lives, the more it pays). 

Dr. Milevsky is the Executive Director of The Individual Finance and Insurance Decisions Centre at York University in Toronto, Canada.  His paper, “Real Longevity Insurance with a Deductible:  Introduction to Advanced-Life Delayed Annuities”, was published in the North American Actuarial Journal, Volume 9, Number 4.  

In his paper, Dr. Milevsky illustrates how an ALDA product could allow a participant to begin making monthly, real-dollar premium payments of $100 at age 40 and begin receiving monthly income of $2,570 in real dollars at age 85, continuing to increase each month for inflation. (This example excludes the effect of lapses as well as any profit margin).

ALDA products can pay out such high multiples of the initial premium payment because of the mortality credits that accrue at advanced ages.  Because pricing for Longevity Protector™ will not be finalized until the insurance company partner has been selected,  precise, real-dollar multiples of initial premium payments are not currently being quoted. However, the provisions below should be largely unchanged in the final product

  • Maturity date must be selected at issue and be at least 25 years out
  • Participants have the option to cease making additional premium payments after 20 years in exchange for a reduced benefit.
  • On the maturity date, the participant can elect to extend the date payments are to begin as long as the extension is at least 1 year, though the maturity date cannot extend beyond the participant’s 90th birthday.
  • The initial guaranteed factors will be based on mortality equal to 75% of the Annuity 2000 table; factors can be increased to reflect actual mortality and lapse experience.
  • Initial investment options are TIPS and the S&P 500 Index

To be certain, a significant amount of education will need to be done to get participants over the lack of a bequeath option on the product to make optimal use of mortality credits.  To a certain extent, it requires getting people comfortable thinking of wealth transfer in intra-generational opposed to strictly inter-generational terms.  However, mortality driven products (including simple life-contingent annuitization), may reduce the need to draw down on other assets, potentially increasing the assets available to bequeath – particularly for those who live a long time.

Similar Products
There are products currently available that have introduced the concept of purchasing a product when younger and annuitizing at an advanced age, but because they provide some sort of limited death benefit or access to premium payments, they do not realize the full potential of mortality credits.  These are little more than an exotic path to mediocre returns.

Hartford Life and New York Life offer two of the more popular products.  The Hartford Income Security product (see illustration) provides for implied annual returns of 5.1% to 6.5% (these returns assume one survives to annuitization, mortality-weighted returns would be lower).  New York Life’s LifeStages Longevity Benefit Variable Annuity (see illustration) provides an IRR of 4.6% to 6.8% depending upon how long one expects to live.* 

The large policy minimums ($10k for the Hartford product, $50k for New York Life) put these out of the reach or comfort zone for most retirement planners.  Small, recurring premium payments (such as those with life insurance) are more reasonable to expect from investors, though some insurers may be unwilling or unable to accommodate that level of administrative complexity.  The NY Life product provides no inflation protection and the Hartford product provides only partial inflation protection for an additional charge.

*Annuity Market News, “Longevity Insurance in a VA Wrapper”, February 2007.  IRR based on 40 year-old investing $100k receiving first payment of $1,850 at age 80.  Calculation provided by Moshe Milevsky

 


©2008 All Rights Reserved String Financial - Designed and Hosted by CS Focus LLC