Longevity Insurance for the Long Haul

Greeters because they want to be?

“Wal-mart… do they like make walls there?”
–Paris Hilton

Have you ever walked into WalMart, seen the smiling greeter at the door, who usually appears to be older than the typical retirement age, and wondered if that person was there greeting people because he enjoyed seeing everyone and wanted to be out of the house and in public or if he was there because he needed the extra income? I often have that mental conversation with myself and hope that it is because of the former – that the greeter gets benefits of seeing people and having, however brief, interactions with them. I fear, though, that more often, the case is the latter – the greeter is there because he needs extra income to make ends meet and has been forced back into (if he ever left) the workforce at an elderly age.

What happened to the person who has to go back to work because his nest egg wasn’t enough to provide him with the income he needed (or wanted)? Wasn’t Social Security supposed to provide the safety net that would prevent this type of scenario? Even if that’s the goal of Social Security, the reality is much different. The average monthly Social Security benefit for a retired worker is $1,230. For a single person over 65, that’s only $359 above the poverty threshold. Even for the thrifty, that is a sere lifestyle.

Furthermore, what happens when the WalMart greeter becomes too old or frail to work and can no longer rely on that stream of income?

He is going to have to cut down on his lifestyle and live a bare bones existence.

This is the nightmare scenario for retirees and those contemplating retirement – running out of money and having to live on a meager stream of government benefits. There is a product which pays you if you reach a certain age, called longevity insurance. The basic idea behind longevity insurance is that you pay an insurance payment now, similar to life insurance, except with life insurance, you get paid if you die, and with longevity insurance, you get an annuity stream of payments if you reach a certain age, usually 85. Longevity insurance is similar to a deferred annuity, except that longevity insurance is usually tied to reaching a certain age, typically 85, whereas a deferred annuity is tied to living a certain number of years, such as 20 or 30 years in the future.

Many people are hesitant to purchase financial products now which will provide payouts later, such as longevity insurance, deferred annuities, and even immediate annuities. They are captured by a behavioral finance phenomenon called prospect theory – you get more pain from losing than you do joy from winning an equivalent amount. They don’t want to die early and not get the full benefit from that money.

Regardless of what you believe happens to you when you die, there is one immutable fact: NOBODY has arisen from the dead and proclaimed “I want my money back!” No version of an afterlife that I am aware of includes looking back and regretting making a financial decision that would have been different had you only known the date when the Grim Reaper was going to knock on your door. It’s the same logic that causes us to fail when we try to solve the annuity puzzle.

I’m not trying to be flippant about religion. What I am trying to do is to make the point that people make decisions not to ensure future cash flows because of an avoidance of a regret that THEY WILL NEVER EXPERIENCE. Instead, if people are worried about estates, taking care of kids, charity, and other uses for money which will be left over after they die, they should make those plans to ensure that the desired outcomes happen rather than taking gambles that everything will work out, which exposes them to the risk that they will achieve none of their desired outcomes instead.

Deferred annuities and longevity insurance are two ways to provide a backstop of income which enable other goals.

Another benefit of these products is that they can be used as proxies for long term care insurance in the case that the purchaser doesn’t expect to be able to qualify for long term care insurance. For example, if you have a family history of diabetes and cancer, then there is a possibility that by the time you want to purchase long term care insurance, you won’t actually qualify. By purchasing a deferred annuity or longevity insurance, the purchaser can guarantee a stream of income which can replace the payments which would have been made in the event of needing long term care insurance payouts. Furthermore, you don’t have to get a medical exam or qualify for deferred annuities or longevity insurance. Underwriters of long term care insurance policies don’t want you to get sick or have a chance of needing to use the policy, which is why they require qualification; on the other hand, providers of deferred annuities and longevity insurance make more money if you don’t reach the target age, so have no reason to disqualify you if you have a family history of medical issues.

Unless you are exceptionally rich, there is no way to offset all of the financial risks you face in life. Longevity insurance can be a relatively inexpensive way of taking the risk of living to an old age and not having enough income off of the table. By insuring against the risk of outliving your assets, you can be the WalMart greeter who does it every day because he enjoys being out of the house and seeing people.

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Jason Hull was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business. He held a CFP certification from 2015 - 2021. You can read more about him in the About Page. If you live in Johnson County, Texas or the surrounding areas, he and his wife are cash buyers of Johnson County, Texas houses.

4 thoughts on “Longevity Insurance for the Long Haul

  1. Well everyone knows that whole Life insurance policy provides coverage for the lifetime also there is bounce, tax benefits etc. Yes many whole life policies provide help you for funerals, medical bills, mortgage, etc. by purchasing this insurance protection we can make sure that our family will be taken care of should something happen to you.

  2. With longevity insurance, you basically are investing in a self-funded pension. If you live long, you come out ahead. If you die younger than your life expectancy, the bank comes out ahead. However, once you’re dead you don’t need the money. Obviously, it is set up so that the bank makes more profit on those who die young than it loses on those who die old. A modest such net profit would be reasonable as the bank’s payment for administering the annuity, but if they set it up to rake in more profit than they deserve then that would not be defensible. I do not know whether the actual such annuities earn the banks a fair profit or an unreasonably large one.

    It is somewhat similar to in Social Security where you choose when to first take your benefits. In my age bracket I could start at age 62 or I could wait till age 70. The later you start your benefits the more you get per month. If you start late, you come out ahead if you live long but you come out behind if you croak early. I don’t know whether it is a better deal financially to wait but if you can get by without the income until the later date it seems prudent to me to wait as long as possible. If you live long, you are liable to need that bigger social security check. If you die young, the govt comes out ahead, but once you’re dead you don’t need the money anyway

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