Longevity Annuities Could Redefine the Retirement Income Planning Landscape
Life Insurance Selling › Vol. 84 Nbr. 1, January 2009
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Summary
Because clients fear the prospect of running out of money, financial advisors have developed a variety of strategies to eliminate or reduce that outcome. Advisors are faced with two imponderables: 1. what future investment returns will be and in what order they will occur, and 2. how long the income that will be derived from the client's portfolio must persist (because we don't know how long the client will live). The second of these is the most troublesome, and becomes even more so as life expectancy increases. Recently, a financial instrument has been developed that offers great potential to advisors seeking to manage the "one big risk" by providing a known answer to that second imponderable. It's called a "longevity annuity" and the way it works is simple: it is a risk transfer device, an insurance instrument. It is not an investment, and investment logic will not discover its value. A a longevity annuity can be viewed as most like a property and casualty insurance product. The real value of the longevity annuity is not in the income it provides, but in the choices it makes feasible.
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Longevity Annuities Could Redefine the Retirement Income Planning Landscape
Risk, like many other four-letter words, describes something unpleasant to be avoided if possible. Unlike most, however, it denotes something that is not well understood.
Finance textbooks speak of many kinds of risk - inflation risk, principal risk, market risk, interest rate risk, currency risk, tax risk, etc. Yet, when the subject is retirement income, none of those things mean much. There's re...See the full content of this document
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