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Insuring the 100 Year-Old Client

The age group projected to show the greatest percentage increase in the United States and Western countries is the centenarian population. Are your clients financially equipped to live a century or more?

“Modal ages for death (the age which the largest number of people die) have continued to increase and are now in the late 80s for many populations,” says Chris Bone, the actuary with Edith Ltd LLC, Flemington, N.J. Bone delivered this projection at a recent Society of Actuaries annual meeting in Chicago. That’s the good news—and the bad news.

Conventional wisdom espoused by financial advisors and echoed in a recent Government Accountability Office study, suggests that longevity preparation should include the following:

  • Delaying Social Security benefits.
  • Converting part of client savings into an income annuity to cover necessary expenses.
  • Opting for an annuity provided by an employers’ defined benefit or defined contribution plan.

But is this enough? People may live longer, but they also are expected to suffer greater costs due to the need for long-term care to handle dementia and other age-related health problems.

Advisors also face the task of helping clients with deteriorating cognitive functions. A client with poor mental functions may be unwilling to give up control of his or her investments to a power of attorney. Advisors may be subject to legal headaches due to misunderstandings.

A Society of Actuaries research project on mortality suggests that financial advisors should identify clients that could live long lives and appropriately structure their finances.

Research shows that those who live to be 100 typically have the following characteristics: They have a mother that was younger than age 25 when they were born. Females typically live longer than males. People who live in rural or low-income areas tend to have shorter life expectancies than those from urban areas. The wealthier, more highly educated, and married populations tend to live longer.

Matthew Grove, vice president of retirement income security with New York Life, says financial advisors are just getting used to dealing with the retirement income phase of clients’ lives. Many professionals are giving immediate annuities a second look as a way to reduce the risk that a person will run out of money.

Over $100 million has gone into the insurer’s new “Guaranteed Future Income Annuity,” a deferred fixed immediate annuity, since it was issued in August.

“We’ve done a lot of research on how income annuities act in an asset allocation portfolio,” Grove says. We see allocations of 25 percent to 40 percent (in income annuities) have a positive effect on retirement income.”

Income annuities anchor a portfolio and can improve the risk-adjusted rate of return on client’s retirement investment portfolio, he adds.

Grove says the average age of income annuity investors is 70, which is the age when the payouts become attractive. For example, a 70 year-old male who invested $100,000 would get about $700 per month from an immediate annuity. By contrast, a 65 year-old would receive about $625 monthly.

Typically, individuals select a cash refund or joint-and-survivor option to the beneficiary if the annuitant dies. These people often also receive income from bonds, dividend-paying stocks and social security. Few, he says, do systematic investment withdrawals.

“They live on the income and don’t want to touch their principal because they are afraid of running out of money,” he explains.

Research published by John Ameriks, an economist with Vanguard Group--formerly with TIAA-CREF, has suggested that a 4.5 percent withdrawal rate can be sustained by adding an immediate annuity to the retirement portfolio. He suggests that advisors couple systematic investment withdrawals from retirement accounts with an immediate annuity for optimal retirement income.

Over a 30-year retirement period, there is greater than a 90 pecent success rate, he reports.

“Our analysis shows that the 4.5 percent withdrawal factor can be sustained with more certainty for long periods of time by adding the risk pooling characteristics of an immediate annuity to the overall retirement portfolio.”

There is no free lunch with annuities as people live longer. Middle income and upper-middle income individuals who lack long-term-care insurance could face financial ruin if they end up having to go into a nursing home. Currently, nursing homes cost $70,000 to $80,000 a year. But expect inflation to drive up the cost over the years. So clients could exhaust their money before going on Medicaid, the state and federal program that provides medical care to the poor. The program varies by state, but typically covers individuals with less than $2,000 in assets.

Affluent individuals also could find themselves under financial pressure if they need long-term care.

In most states, for an immediate annuity to be considered an exempt asset for Medicaid, it generally must meet these conditions.

• It must be irrevocable and nonassignable. This means your client can’t be able to redeem or sell it. Typically, immediate annuities are irrevocable contracts. However, this rule could snag some of the latest immediate annuities that give a policyholder the option to withdraw cash.
• It must be actuarially sound. The annuity must be structured so that the policy pays back the cost of the annuity over the policyholders life expectancy based on Medicaid tables.

To ameliorate these issues, experts say advisors should recommend long-term care insurance for well-heeled clients.

"For affluent clients, it's less a matter of running out of funds as it is being forced to liquidate funds at the wrong time or delaying care for fear of running out of funds," explains Jesse Slome, executive director of the American Association for Long-Term Care Insurance. "In the years to come, Medicaid will no longer allow affluent individuals to shelter money in order to turn to taxpayers to pay their long-term care costs so if advisors are recommending this practice, we'd advise that they make sure their errors and omissions insurance are in place."

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