Last year, I posted an item about the products that investment banks were developing to assist institutions in hedging their exposure to the longer lifespans of their beneficiaries. Recently, Investment News had an article on the developing market for longevity insurance, and a column in support of its use in the retirement plans of individuals.
The development of the longevity insurance, actually a deferred fixed annuity, is an enormous benefit for individuals who are at risk of outliving their assets. When properly coupled with Social Security benefits and immediate annuities, it can ensure that the income provided by an investment portfolio is replaced just as that assets are exhausted. The biggest drawback has been that there is no recovery of principal on death, even if benefits have not begun. In response to this objection, some of the products making it to market are including a death benefit or return of principal provision. The Hartford, MetLife Inc., Symetra Life Insurance Co. and New York Life are mentioned as writing the contracts.
The contracts are apparently getting a boost from regulators. Both pieces mention that the Labor Department is developing guidelines for offering the contracts in retirement plans. This would promote the distribution of the contracts as it will make it easier to market the offerings to 401(k) and IRA accounts. Wider distribution reduces the possibility of adverse selection and promotes more competitive pricing, improving the risk exposure of the companies writing the policies and the prospective income to the individual.
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ReplyDeleteIt's a great concept and I've used the Hancock product a few years ago, but in the current market shouldn't it be more effective when interest rates start to rise?
ReplyDeleteIf what you are suggesting is that the price of a given amount of income will decline as interest rates rise, then you are correct. However, low current interest rates also imply low total returns in the capital markets. This will lead to a shorter period for which the portfolio will provide an income stream. Also, the amount of time that you wait for interest rates to increase will decrease the amount of discounting time for the annuity, mitigating the amount by which the price will be lowered.
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