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 Everyone worries about outliving their savings. And as we live longer , the chances of doing just that are increasing.
Today,
at least one in five baby boomers are expected to live in retirement
for more than 30 years. But will they be able to pay for it?
“We’re
facing a huge problem with baby boomers who haven’t saved enough for
retirement and have instead put their money in joining health clubs and
eating healthy,” says Chris Cordaro, a fee-only financial planner in
Chatham, N.J. “They’ll live longer, yet they don’t have enough for it.”
Insurers
in the past year have rolled out a new kind of 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.
Currently, two large insurers, New York-based
MetLife Inc. and Hartford, offer longevity products. New York Life
Insurance Co. also has jumped into the marketplace, adding a longevity
element to its immediate annuities that allows investors to increase
the size of their payouts five-fold after a certain age or period of
time.
When longevity products were introduced, some financial
planners were critical because the investments, while similar to
annuities, carried high commissions and lacked some of the flexibility
traditional annuities offer, such as inflation protection and
return-of-premium benefits, which let your heirs collect the premium
when you die, minus any payouts already made. Insurers have since added
some of these options. But such features add considerably to the cost,
which leads critics to still question whether such products are worth
the investment.
Everyone worries about outliving their savings. And as we live longer, the chances of doing just that are increasing.
Today,
at least one in five baby boomers are expected to live in retirement
for more than 30 years. But will they be able to pay for it?
“We’re
facing a huge problem with baby boomers who haven’t saved enough for
retirement and have instead put their money in joining health clubs and
eating healthy,” says Chris Cordaro, a fee-only financial planner in
Chatham, N.J. “They’ll live longer, yet they don’t have enough for it.”
Insurers
in the past year have rolled out a new kind of 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.
Currently, two large insurers, New York-based
MetLife Inc. and Hartford, offer longevity products. New York Life
Insurance Co. also has jumped into the marketplace, adding a longevity
element to its immediate annuities that allows investors to increase
the size of their payouts five-fold after a certain age or period of
time.
When longevity products were introduced, some financial
planners were critical because the investments, while similar to
annuities, carried high commissions and lacked some of the flexibility
traditional annuities offer, such as inflation protection and
return-of-premium benefits, which let your heirs collect the premium
when you die, minus any payouts already made. Insurers have since added
some of these options. But such features add considerably to the cost,
which leads critics to still question whether such products are worth
the investment.
How it works
In its simplest form,
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.
The purchase doesn’t have to be made at 60
or 65. Marketers of these products generally focus on those years
because that’s typically when investors have a good idea what kind of a
retirement stash they’re looking at, and how much longevity income they
might need — or at least how much they can afford.
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, because 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. The National Center for Health Statistics projects that a
65-year-old male will live, on average, to 82, and a 65-year-old woman
to 85.
“The insurance companies rely on the fact that people
aren’t going to live that long to provide the payouts to the select few
that will,” says John Smith, a fee-only financial planner in Itasca.
Another
risk is that of missed market opportunities. Because the amount of a
longevity payout is determined when you make the initial investment —
unlike a deferred annuity, which sets the payout amounts when the
investment annuitizes — investors potentially miss out on market gains
that may exceed the rate agreed to when the purchase was made.
Purchasers of deferred annuities, by contrast, can receive bigger
payouts if markets outperform expectations.
Longevity products
are also quite pricey, partly because they are relatively new and
competition is scarce. Commissions for agents who sell Hartford’s
products range from 5 to 7 percent — a significant load that cuts the
size of your future payouts.
Flexibility, at a price
The
high price of those new options, critics say, dilutes the original
purpose of longevity products — to provide income protection at the
lowest possible cost.
“A return-of-premium option might add 45
percent to 50 percent to the cost,” says Chris Raham, a longevity
expert with Ernst & Young.
Hartford, for its part, has added
several options to its original Hartford Income Security: an
inflation-protection feature, the ability to pay the premium over a
10-year period rather than a lump sum, a death benefit, and a
facility-care benefit, which allows owners to start receiving income
earlier if they need to enter an assisted-living facility.
In
the basic version, with no extras, a 60-year-old male would pay $26,168
to start receiving $2,000 a month at 85. If he wanted to add a hedge
against inflation, say a 3 percent increase each year after the payouts
start, the premium would be $29,966. The basic plan with a
return-of-premium benefit costs $34,937. And to purchase inflation
protection and a return-of-premium benefit, the price jumps to $40,075.
A
caveat from Cordaro: Because Hartford’s inflation protection begins
only when the monthly payouts start, the investor first has to watch
inflation erode his planned payouts for 25 years.
John Diehl,
president of Hartford’s Retirement Solutions Group, says Hartford’s
inflation protection begins with the first payout because it’s too
difficult to project future inflation rates, and no one knows how long
a buyer will actually live.
Expanding options
Whether
you decide to invest in a longevity product or an annuity, the most
valuable benefit of either may be what it allows you to do with the
rest of your money. With a guaranteed income stream kicking in at a
known date in the future, for instance, you can take a more aggressive
approach with the rest of your portfolio. You can also make larger
gifts to your heirs, and reduce your estate taxes.
“If you have
income from age 85 on covered, you can give a lot more to your children
and charity now,” Cordaro says. Aside from the tax benefits, “you’ll
get to see your money put to good use.”
In its simplest form,
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.
The purchase doesn’t have to be made at 60
or 65. Marketers of these products generally focus on those years
because that’s typically when investors have a good idea what kind of a
retirement stash they’re looking at, and how much longevity income they
might need — or at least how much they can afford.
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, because 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. The National Center for Health Statistics projects that a
65-year-old male will live, on average, to 82, and a 65-year-old woman
to 85.
“The insurance companies rely on the fact that people
aren’t going to live that long to provide the payouts to the select few
that will,” says John Smith, a fee-only financial planner in Itasca.
Another
risk is that of missed market opportunities. Because the amount of a
longevity payout is determined when you make the initial investment —
unlike a deferred annuity, which sets the payout amounts when the
investment annuitizes — investors potentially miss out on market gains
that may exceed the rate agreed to when the purchase was made.
Purchasers of deferred annuities, by contrast, can receive bigger
payouts if markets outperform expectations.
Longevity products
are also quite pricey, partly because they are relatively new and
competition is scarce. Commissions for agents who sell Hartford’s
products range from 5 to 7 percent — a significant load that cuts the
size of your future payouts.
Flexibility, at a price
The
high price of those new options, critics say, dilutes the original
purpose of longevity products — to provide income protection at the
lowest possible cost.
“A return-of-premium option might add 45
percent to 50 percent to the cost,” says Chris Raham, a longevity
expert with Ernst & Young.
Hartford, for its part, has added
several options to its original Hartford Income Security: an
inflation-protection feature, the ability to pay the premium over a
10-year period rather than a lump sum, a death benefit, and a
facility-care benefit, which allows owners to start receiving income
earlier if they need to enter an assisted-living facility.
In
the basic version, with no extras, a 60-year-old male would pay $26,168
to start receiving $2,000 a month at 85. If he wanted to add a hedge
against inflation, say a 3 percent increase each year after the payouts
start, the premium would be $29,966. The basic plan with a
return-of-premium benefit costs $34,937. And to purchase inflation
protection and a return-of-premium benefit, the price jumps to $40,075.
A
caveat from Cordaro: Because Hartford’s inflation protection begins
only when the monthly payouts start, the investor first has to watch
inflation erode his planned payouts for 25 years.
John Diehl,
president of Hartford’s Retirement Solutions Group, says Hartford’s
inflation protection begins with the first payout because it’s too
difficult to project future inflation rates, and no one knows how long
a buyer will actually live.
Expanding options
Whether
you decide to invest in a longevity product or an annuity, the most
valuable benefit of either may be what it allows you to do with the
rest of your money. With a guaranteed income stream kicking in at a
known date in the future, for instance, you can take a more aggressive
approach with the rest of your portfolio. You can also make larger
gifts to your heirs, and reduce your estate taxes.
“If you have
income from age 85 on covered, you can give a lot more to your children
and charity now,” Cordaro says. Aside from the tax benefits, “you’ll
get to see your money put to good use.”
Ready To Get Started with a longevity annuity? Have a Rep Contact You!
It takes just 30 seconds to see how affordable a longevity annuity can be to insure against outliving your retirement savings.
Payments can begin anytime after age 70. You Decide!
There are provisions for refund of premium paid in the event of death as well as loan provision prior to annuitization.
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