Addressing Longevity Risk

Know how to best mitigate your clients’ financial risks in living to a ripe old age.

My friend, Cavett Robert, founder of the National Speakers Association, took a question

from the audience. A young man raised his hand: “Mr. Robert, may I ask, please, how old you are?” Cavett, impeccably dressed with perfectly creased slacks and a contrasting blazer, wearing spotlessly shined Italian leather loafers, in his deep-toned, beautifully resonant voice responded, “Son, I’m 87 years old.” The man pondered then said, “I don’t think I want to be 87.” Mr. Robert, without missing a beat answered, “Son, that’s because you’re not 86.”

It is said that time is the fire in which we all burn. When I was studying for my CLU® I learned that the word for what this article is about is “superannuation.” That’s just a fancy way to say getting old.

Let’s approach this subject from two perspectives: that of the person approaching or in retirement; and from the perspective of their children, the 30-and 40-somethings who are stuck in the middle of a potentially terrifying financial nightmare, the so-called “sandwich generation.”

This is the first time in American history that a generation has reached adulthood with more parents living than children. Our 30-, 40- and 50-year-old clients are faced with the disheartening vision of having people at both extremes of life financially reliant upon them for survival.

This recent press release from the Social Security Administration highlights the viciousness:

In some situations, where there simply are not enough assets to support the superannuated individual, permanent cash value life insurance might help solve the problem. It can work like this:

1. Adult children with aging parents obtain a modest life insurance policy on the parents.

2. The adult children own the policy and pay the premiums.

3. The cash value in the policy can be used during their lifetime to assist the parents as needed (keeping in mind that this impacts the death benefit).

4. The policy proceeds (minus any loans or surrenders) can be used to cover final expenses or satisfy debts that would be paid by the adult children after their parent’s death. This avoids children having to divert additional assets that would otherwise have gone toward helping themselves with long-term savings, college funding, retirement planning, debt reduction, etc.

This is a new dynamic. The demographics have created a new call for life insurance. Underwriting these cases will present challenges at times. In addition to medical issues becoming more prevalent, carriers will likely limit the amount of coverage to a modest amount. But, our industry is obligated to answer that call. On the other hand, when working directly with the retiree, the strategy to achieve financial security in retirement integrates three key concerns retirees have:

• Having enough resources to provide income for life,  however long their life may be.

• Protecting the assets they’ve accumulated from risks they will face in retirement.

• Enabling them to provide whatever financial legacy they desire.

As part of this process we consider the risks that might impact the plan, including longevity—the risk of outliving their assets. This is imperative in the face of potential long-term health care expenses and the near certainty of rising inflation and income taxes.

Note the following chart from the Society of Actuaries. It  indicates that once a couple reaches age 65, in approximately half of the cases, at least one of them will live to 90 or beyond. Tasking a retirement nest egg to generate enough inflation adjusted, after-tax income to last the retiree for 25 or 30 years is a tall order, even without desiring to leave a legacy. We endeavor to provide the best possible financial security for every client every day. We should be concerned that they not suffer from worry over the risk of outliving their money. We don’t want to leave them wondering, “When will I run out of funds?”

Our first step in addressing longevity risk is to analyze their fixed needs versus their total needs. In other words, can we at least make sure they can take care of their indispensable requirements?

One of the simplest and most effective ways of accomplishing this is to match guaranteed income flow to the client’s essential needs, possibly with an annuity. An annuity provides a sustainable river of retirement income and can supplement other variable sources of income. This mechanism can eliminate much of the worry and apprehension.

An annuity provides a protected, secure and predictable fail-safe lifetime income. Annuities provide a revenue source that can offset the risk of outliving one’s assets. Fixed income annuities are impervious to marketplace fluctuations. While fixed annuities are not subject to market fluctuations, over time, inflation will likely impact buying power. Note that the guarantees in annuities are subject to the claims-paying ability of the issuer. Choose wisely.

Whole life insurance can help clients meet their needs, as well. No other product grosses up the estate—and thus its potential income—for the rest of the surviving spouse’s life. The death proceeds can even make up for financial losses previously sustained in the retirement nest egg. Nothing else works like that. Policy cash values can be accessed to enhance other retirement income, pay long-term care insurance premiums and/or provide a financial emergency fund. Advisors must consider this in every case, because the interest of the client is the only interest to be considered.

by Timothy E. Radden, CLU®, ChFC®, AEP for the Winter 2012 issue of The Wealth Channel Magazine.

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