For centuries, humankind has searched for the Fountain of Youth. Its draw is legendary — enticing men like Ponce de Leon to embark on voyages to unknown regions in search of it.
Today it seems as though the Fountain of Youth has been found — not via armadas on the open seas or by cutting through jungles, but by men and women working in lab coats and researching the innermost workings of our earthly vessels.
The proof is in the numbers. The actuarial community publishes tables to predict how many people of a given age will die in a given year. These tables, known as Commissioners Standard Ordinary (CSO) tables, are accepted as “gospel” among this group of professionals, and are updated when the actuarial community agrees that the change in longevity is significant. The CSO tables have been extending over the past 70 years, and they experienced another jump this year.
Here are a few observations that come to mind after reviewing these life expectancy tables.
People are on average living 30 percent longer than they did at the start of World War II.
Men are closing the gap. Over the past 20 years, men have extended their longevity by 12.5 percent whereas the average woman’s lifespan is only 9 percent longer.
A “normal retirement age” of 65 (or 67 depending upon when you were born) may be unsustainable for the population at large. At age 65, a 2017 retiree will need to have three times the assets their father needed when he retired in 1980. A greatest generation dad lives on average another five years in retirement while a baby boomer son will live for an average of 15 years in retirement.
The slope of the longevity curve is trending sharply upward.
These life expectancy tables represent a statistical average. Half the female population will live to age 83. Once you make it to age 83, the present table extends longevity as high as age 120.
So what does this all mean in the world of insurance and financial products? In a word — everything.
Here is how increased lifespan has affected long-term care and longevity guarantees.
Long-Term Care Insurance
First offered in the late 1970s, long-term care insurance typically pertains to medical support coverages that are generally not available or only available on a limited basis under private medical insurance or Medicare. Benefits provided include home health care, private duty nursing (in or out of a care facility), live-in caregiving and housekeeping assistance.
Claims are based upon the client’s inability to perform as few as two of the basic activities of daily living such as dressing, bathing, feeding themselves, toileting, continence, transferring (getting in and out of a bed or chair) and walking. Roughly 70 percent of individuals over age 65 will require at least some type of long-term care services during their lifetime. About 60 percent of those over age 75 will spend some period of time in a nursing home.
Since 2010, many carriers have either severely limited the policy benefits they offer, dramatically increased premiums or even pulled out of the LTCi market. The factors affecting these changes have included the increased costs of private nursing facilities and the aforementioned issue of longevity.
LTCi policies once provided lifetime coverage but now typically are capped at six years of benefit payment. The current approach is to attach a long-term care rider onto a life insurance policy. Often expressed as a percentage of the death benefit — these riders provide a pool of cash available to pay the cost of care. They also follow a similar claims process based upon the client’s inability to perform basic activities of daily living. Because these riders can rarely be added to existing policies, age and insurability become factors to consider.
After attending to health care needs, the second financial concern resulting from longer life expectancy is not outliving assets.
Several seismic shifts have made this a greater concern than it ever was for our parents. Among them is the virtual end of defined benefit pensions, enhanced volatility within the financial markets, growing investor confusion and uncertainty resulting from information delivered through the fire hose known as the internet. Sprinkle in persistently low interest rates, and one’s financial concern ratchets higher.
A variety of unique investment products have arisen to meet these needs and allay those fears. One of the more creative is a type of rider that is added to an annuity. These guaranteed minimum benefit (GMB) riders are commonly attached to many annuities sold today.
GMB riders provide an investor with a minimum level of annuity payment while the annuity is in the accumulation phase and a base amount of lifetime income while in the distribution phase — regardless of how the investment has performed. These “guarantees” are paid for by the assessment of a fee (between 0.75 percent and 1.25 percent) against the performance of the underlying investment itself.
In order to receive the guarantee — the investor must “annuitize” their payment (take over the remainder of their life). This may not be true of all products and may void the riders.
Unlike traditional “period certain” annuities, these newer contracts offer refund of premium or enhanced death benefits should one buck the longevity trend and pass away on the wrong end of the actuarial curve. As a result, they often become an important financial planning tool. Much like with the traditional defined benefit pension, with GMB riders the client is provided a base amount of lifetime income upon which the remainder of retirement assets can be invested.
How the trend of extended life expectancy will continue to play out is anyone’s guess. Will the longevity arc continue trending upward? And, if so, what product innovations remain to be seen?
Anthony Domino Jr. is managing principal with Associated Benefit Consultants, Rye Brook, N.Y. He may be contacted at [email protected]