In an interesting follow up article to our post on Longevity Insurance a few weeks ago, the Wall St Journal has this piece on modified deferred annuity contracts.
The key point: even though actuarial research would confirm that pure longevity insurance is probably the best payout you can find, few consumers opt for it as it has a long deferral time. So shorter maturity deferred annuities are gaining popularity:
The original article is here:
For years, the only option for a fixed-income annuity was the immediate annuity. Purchasers could pay a lump sum for an insurance contract that guaranteed usually monthly payments that started shortly thereafter and lasted the rest of their life.
Then, in 2004, insurers came out with a new fixed-income product: longevity insurance, which delays payouts until the buyers are in their 80s or older.
Trouble is, few consumers wanted to buy longevity annuities, in part because they were seen as too much of a gamble.
Now insurers have introduced annuities that start making fixed payouts in just five to 10 years. Many buyers of these products are in their 50s and using them as substitute pensions to help supplement their income at the very outset of their retirement.
But some experts, like Moshe Milevsky, an associate professor of finance at York University, say these annuities don’t guarantee enough income for later life. The payouts start earlier and tend to be smaller than those envisioned in the original longevity products, he says, and few policies offer automatic cost-of-living increases.
At MetLife Inc., MET +0.57% such increases are an option but not many customers choose them, says Bennett Kleinberg, a vice president and senior actuary who heads the company’s retail annuities. Moreover, only a few of the company’s annuity investors want to wait for longevity policies to begin paying out, Mr. Kleinberg adds. Only 10% opt for the “maximum” version of the Longevity Income Guarantee, which begins paying benefits at 85, he says; the rest choose a version which allows them to draw benefits in five or 10 years.
From the beginning, longevity products were “a very difficult sale,” says Gary Baker, president of U.S. operations for Cannex Financial Exchanges Ltd., a Toronto firm that compiles data about financial products. “It made sense with actuaries, but not across the kitchen table” where insurance sales take place, Mr. Baker says.
Mr. Milevsky is a fan of the deferred annuities now popular with consumers, but he says they’re “version 1.0, and we need to get to 3.0.” Inflation protection costs more but is essential, he says, and consumers should take the threat of inflation more seriously.