Life insurance and annuity companies have the big buildings for a reason: They know when you’re going to die. Or do they?
Knowing when you are going to die doesn’t mean that actuaries are evil, but it does mean that they fully understand life expectancy. When you buy an annuity and structure it for a lifetime payment, you are in essence betting with the carrier that you are going to live longer than they project you to live. Regardless of how long you last, the carrier is on the hook to pay.
In a recent Time magazine’s article, it projected that newborns could live to age 142. Does that mean the new age 70 is 110? If so, then it’s time to buy your children and grandchildren a lifetime income annuity, and attach a 3% COLA (i.e. annual increase) as the ultimate legacy gift to your family. The only worry would be if the annuity carrier will be around to back up the guarantee, so choosing a quality company would definitely be priority one. Could annuity buying be that simple?
No ROI till you die
With lifetime income guarantees with an annuity, there is no return on investment until you pass away. Up until that point, it is a true transfer of risk strategy.
According to Laura Carstensen, the director of the Stanford Center of Longevity, “for the first time in U.S. history, the number of people over 60 exceeds those under age 15.” Another reality shocker she points out in the Time article is that “an American born today has a projected average lifespan 20 full years longer than one born in 1925.” Combining those two factual tidbits is what keeps annuity actuaries up at night because their job is predicting your death and pricing products accordingly. Talk about falling off a life expectancy cliff.
Resetting the life expectancy table
I assume that annuity carriers are aware of this predictable shift to a longer life expectancy, and this recent Time magazine article and other longevity campaigns didn’t blindside them. Ongoing health regulations along with vaccines, public health campaigns, improved medical procedures, and regenerative medicine strategies will continue to enhance longer lifespans. Annuity actuaries are closely watching all of these longevity advancements with a sharpened pencil.
With interest rates at historic lows, annuity companies are going to have to figure out how to continue making money. The demographic tidal wave of baby boomers wanting contractual guarantees helps, but longer life expectancy tables and the corresponding repricing (i.e. lowering) of lifetime payments seems inevitable.
It’s important to remember that annuity lifetime payments are based on your life expectancy at the time the payments start. The longer your life expectancy, the lower the payments. It’s just that simple, and that means the insurance company gets to hang on to your money a little while longer.
Carrier quality is key
Even though there are state guaranty funds backing up annuity purchases to certain dollar limits, your primary buying decision should revolve around the claims paying ability of the issuing carrier. In other words, annuity guarantees are only as good as the company backing them up.
There are four primary ratings firms that track annuity and life insurance companies, but I recommend using the COMDEX Ranking, which is a 1 — 100 scoring system using all four agencies.
How early is too early?
Time magazine’s prediction about advanced longevity certainly doesn’t mean that there is an urgency to buy a lifetime income annuity guarantee. By the way, there is never an urgency to buy an annuity. Only purchase an annuity as a transfer of risk, noncorrelated asset that contractually solves for your personalized and specific goal.
With that being said, maybe it’s worth considering a bet against today’s life expectancy tables by securing a lifetime income annuity for you or someone in your family. The risk transfer odds just might be in your favor. (Credit:SHaithcock/MarketWatch2015)