Take the Money and Run?

There is no doubt some increased interest in longevity "insurance" packages these days, hand in hand with the uptrend in media attention given to longevity research and increasing public awareness of the same. Enough so that mainstream articles on longevity insurance are surfacing here and there:

Insurers in the past year have rolled out a new product that aims to fill that need. It's a type of investment the industry refers to as "longevity insurance," which guarantees that you won't outlive your money.

These products aren't really insurance. With most, for one thing, your investment is lost if you die before the payouts begin. Longevity products are more like a mix of deferred and immediate annuities. Like a deferred annuity, you invest money now with the agreement to start receiving monthly payments later -- say at age 85 -- for the rest of your life. Like an immediate annuity, your projected income stream is calculated at the time you invest. The payouts are considerably higher than those of deferred annuities. But the costs can be high, too.

Here's what you need to know:

The premise of longevity products is that by making a one-time payment, you will start receiving guaranteed lifetime income at a designated point in the future. Your projected income stream is calculated at the time that you invest.

Compared with deferred annuities, longevity-product payouts are considerably higher. For example, if a 65-year-old man invested $10,000 in a deferred fixed-income annuity from MetLife, in 20 years he would start collecting $137 a month, assuming the investment grew at the minimum guaranteed rate of 3 percent.

But if that man instead invested in MetLife's longevity product, his monthly payout would be $665.

Why such a big difference?

For starters, this particular investment, like most basic longevity products, offers no death benefit. If purchasers don't make it to 85, their investment is forfeited. And the majority of today's 65-year-olds may not live that long.

Here is a knee-jerk response: unless these products are stunningly bad value for money under very conservative estimates for growth in life expectancy in the old, those companies to offer longevity insurance packages will be taking a bath twenty to thirty years from now. You might recall that the actuaries are wavering on their estimates for life expectancy, and a healthy debate is taking place in the actuarial community as to just how to account for the ongoing revolution in biotechnology and medicine. An insurer that offers fair valued, competitive products today based on the actuarial trends of the past few years will find themselves in trouble down the line if the efforts of groups like the Methuselah Foundation succeed, or even if the systems biologists have their more modest way.

It would seem to be the case that either:

a) enough people die at younger ages than you that the offering company makes money and stays in business. In other words, healthy life extension research did not succeed rapidly enough to help you either - you will age, suffer and die.

b) healthy life extension takes off and the insurer is left with a huge liability, which may or may not actually be paid. That depends on how well the insurer handled the funds, the level of economic growth across the years, and the level of interest in the original product, amongst other items. Bribing politicians to write new law to remove obligations is a very predictable out, however.

c) the product is of poor enough value that the company can offer it even though healthy life extension research succeeds - in which case you would likely have been better off placing your funds elsewhere.

The point of purchasing longevity insurance is, of course, to mitigate risk in your later life, when you are less able to earn or raise funds due to the effects of aging - assuming that healthy life extension technology does not arrive in time restore health and vigor. Whether that is worth the loss of investing those funds yourself for 20 or 30 years is between you and your level of comfort with risk. The removal of risk is, in essence, the product you are purchasing with that opportunity cost. Point (b) above is a potentially serious problem when looking at the exercise in that light. If healthy life extension advances rapidly, everyone lives, but your investment vanishes into political games and shirkmanship. If healthy life extension doesn't advance rapidly, your later life will be less financially risky - but you will age, suffer and die.

So as usual, a "take the money and run" strategy isn't going to work if everyone does it, or if everyone simply assumes that healthy life extension is coming, rather than getting out there to help make it happen.

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Assume a 9% rate of return.
$10K grows to $60K in 20 years and then pays out $450/month indefinately. So they do not need many people to die before payour (currently over 50%) or after only a few years of receiving the payout.

It looks like a good deal for the insurance company. Of course, they assume a lower rate of return. S&P 500 averages 10% over long periods.

Posted by: Robert at December 26th, 2006 7:59 PM

"If healthy life extension advances rapidly, everyone lives, but your investment vanishes into political games and shirkmanship. If healthy life extension doesn't advance rapidly, your later life will be less financially risky - but you will age, suffer and die."

That sounds fine to me.

Either way, you've reduced volatility and the extremes. If you will live forever, then you live forever a little poorer. If you're going to die shortly, at least you won't do so in poverty.

Posted by: gwern at January 28th, 2011 8:02 PM

Or you could instead use that money you would have put towards longevity insurance (or any other insurance policy) and put in towards longevity research orgs like the SENS or Methuselah Foundations. If you end up slowly deteriorating in an old folks home extra money barely affects your quality of life. I think that same argument could apply to spending money on virtually anything; buying a cheaper car now and donating the money saved could mean a healthier life later. Health trumps everything else when you really think about it.

Posted by: Kim at January 29th, 2011 8:09 PM

When I first heard of this product, I thought it was just a deferred fixed annuity, which was one of the two types of annuities that existed when I was in high school learning family financial management (sad that that is no longer taught). I understand that that product died because people did not want to make a payment for which they might receive "nothing". That mindset has not changed much. Notice how people do not think of Social Security as insurance but as an investment account (think of the arguments for "privatizing" Social Security) and expect to get a payback of their "investment" plus investment earnings. Americans don't understand what insurance is and its risk in a family's financial structure. You need to educate all of us on these matters.

Posted by: Thomas at January 28th, 2014 5:59 PM
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