Tontines: Not a Smart Idea In An Era of Biotechnology

There have been repeated rumblings on the topic of longevity insurance in the past few years:

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.

In general, betting against increasing longevity seems to be a fool's game. But even the venerable tontine is making a comeback as the vast - and consequently archly conservative - insurance industry grapples in slow motion with uncertainty brought on by radical change and progress in biotechnology and aging science:

If you die earlier than your scheme's age range, your family receives your original lump sum without any investment gains. But if you live, you will be paid an income which goes up every year depending initially on your investment growth - this is offshore in Ireland so tax is minimised - but also on how many others in the plan die.

The clever part, according to the company, is the so-called "birthday units" - although "deathday units" would be more accurate, as survivors get a regular investment boost from the funds of plan holders who die. Helped by the death of others, a man on an 80 to 100 plan with £50,000 originally invested would get £19,600 a year at 80, rising to £30,600 at 90 and increasing to £257,000 a year 10 years later when he reaches 100. But do its figures stack up? And is it the only solution? "It sounds like a tontine to me," says retirement income expert Nigel Callaghan at Hargreaves Lansdown. A tontine is an old-fashioned form of life insurance where everyone pays in but the last one living scoops the pool.

Looking at the Wikipedia entry for "tontine", I note:

Tontines were the first government bonds issued anywhere in the world, and the British government first issued tontines in 1693 to fund a war against France. However, tontines soon caused problems for their issuing governments, as they would increasingly underestimate the longevity of the population.

Sound familiar? The monolithic, regulated insurance industry of today, faced with the potential of true rejuvenation medicine in the next few decades, isn't looking much better than 17th century governments. It just isn't smart to bet against healthy longevity in the midst of revolution in biotechnology. A great many people will wind up losing their shirts - make sure you aren't one of them.


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