Wednesday, June 29, 2011

Do You Need Longevity Insurance?

Most of us probably pay too much for insurance.

This is not as startling a statement as it might appear. The huge financial fortunes that have created companies such as Prudential; Metropolitan Life; and Berkshire Hathaway have been based on the idea that most of us are willing to pay to protect ourselves against events that either have a low probability of occurring or may never happen.

We all have homeowners' insurance, for example, even though statistically the odds of a house burning down any particular year is extremely remote. The prospect of losing everything in a fire is, for most people, too devastating to take a chance.

When it comes to insuring against events in our old age, however, both we and the industry are still evolving. For example, long term care insurance was really not needed a generation or two ago since most people simply didn't live long enough to need it.

Another idea whose time might be coming is longevity insurance.

The idea here is pretty simple, according to an article written by Tara Siegel Bernard in Tuesday's New York Times:

You can agree to begin collecting the insurance at a much later date in the future, like your 85th birthday. So if you live past your life expectancy, you’re covered. And since most people don’t know when they’re going to die, this allows you to spend down your retirement savings more liberally because you know your payments will kick in later. The big risk, of course, is that you won’t see a dime because you die before you can collect.

Ms. Bernard goes through some numbers later in the article, based on a new policy offered by New York Life. I need to spend more time on the math, but on the surface the idea makes some sense.

I do have a couple of concerns, however. First, this is still a fairly new product, which means that the industry is still not clear on how to price longevity insurance. And, second, it is also possible than an individual might be be better off by simply taking the premiums that they would have paid the life insurer and invest in the market themselves.

Still, a worthwhile read.