As life expectancy for American seniors continues to rise, many aging adults face the problem of outliving their retirement savings.
Annuities can help, but despite their benefits, few older adults buy them. Recently, the federal government has begun touting a new type of annuity, called longevity insurance.
Now, a new study has determined the types of people who are more likely to buy this kind of benefit. The findings could help financial advisers identify these people and sell the products to those who would most benefit from them.
Longevity insurance is a specific type of annuity that requires an upfront payment in exchange for monthly payouts later in life. The insurance does not begin monthly until a certain age—usually between 80-85 years old. Once those payouts begin, they continue in perpetuity until the policyholder dies. Because longevity insurance payouts begin so late in life, they’re much larger each month than typical annuities.
For the study, published in the journal Geneva Papers on Risk and Insurance—Issues and Practice, researchers examined demographic data to determine characteristics of consumers who are more likely to purchase longevity insurance in the future. The findings show that people who buy longevity insurance primarily are younger women, people with higher levels of risk tolerance, and people with less home equity.
In some cases those more likely to buy longevity insurance are not necessarily those who will benefit from it the most.
“Longevity insurance is designed to insure that older adults never run out of money,” says Michael Guillemette, assistant professor of personal financial planning at the University of Missouri. “In many cases, it makes sense for healthy older adults to buy longevity insurance when they are approaching retirement. This insurance can help seniors with lower risk tolerance as they prefer greater certainty in advanced age.”
It’s important to understand what types of people choose to buy and not to buy longevity insurance so that financial advisers can find ways to convince people who need this insurance that it’s a wise financial choice—and to direct people who won’t benefit from it to other options better suited to their specific goals.
Researchers from the University of Texas-Rio Grande Valley, the American College, and Texas Tech University are coauthors of the work.
Source: University of Missouri