Standardized, Unitized, Accretive Longevity Insurance: Lessons from the Differing Demand for Annuities and Life Insurance
By Andrew Stumpff Morrison
The historic U.S. shift from defined-benefit to defined-contribution employer-sponsored retirement plans has produced, among other things, a reduction in sharing of the risk of outliving one’s retirement savings. Commercial annuity contracts are available to insure this risk, but despite efforts to encourage their acquisition, few people own them. Close comparison with another life-cycle risk – that addressed by life insurance, which is more widely purchased by consumers – highlights as a probable reason for this low uptake the nature of the annuity-purchase decision: the decision’s magnitude and timing, as now typically presented to American employees. The paper argues that the annuity choice both could and should be presented – expressly as an insurance rather than an “investment” decision – to employees incrementally throughout their careers, instead of as a single, large lump-sum purchase near or after retirement. Such a shift at the necessary scale would appear to require changes in both annuity markets and retirement-plan design. To facilitate these, the paper proposes and defends a standard, generic, identifiable-in-advance definition of realization of “longevity risk” (the lack of such a standard currently representing a notable difference with life insurance):
“Longevity risk” begins to be realized upon living past one’s expected age at death, determined as of (and assuming survival until) one’s expected retirement age.
Agreement upon a standard definition (requiring absolute reference only to an agreed demographic/actuarial data-source) could help with formation of a more robust annuity-marketing industry environment – another prominent current contrast with life insurance. It could also enable changes to retirement plans, potentially encouraged by legislative measures, that would permit in-plan accumulation of longevity insurance incrementally, over time, in coherently additive units.
Source @Papers
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