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Why are so many so unwilling to take the plunge with longevity insurance?

No one ever relishes having to write a sizeable check to the insurance company. However, the benefit of this exercise soon becomes apparent as you are granted the much-needed peace of mind from knowing you are covered in the event of the unimaginable or, in the case of an annuity, that you are guaranteed regular payments.

Interestingly enough, recent research shows that many consumers are electing not to purchase a particular type of annuity known as longevity insurance over concerns that it may be too costly or too risky of a proposition.

For those unfamiliar with longevity insurance, it is designed to provide policyholders, who make a one-time sizeable payment, a fixed monthly sum that starts when they reach 80 or 85, and terminates upon their death.

While it would seem that the prospect of guarding against a possible decline in income would be something that would appeal to the risk-adverse, the aforementioned study, published in the insurance-industry publication The Geneva Papers, found just the opposite.

As part of the study, the researchers took a closer look at the results of a 2014 industry survey designed to assess the ages and risk tolerances of 5,000 people. Here, 34.1 percent of the survey pool indicated that they would be “unlikely” to purchase longevity insurance and another 32.6 percent indicated that they would be “somewhat unlikely” to take the same step.

Applying their own metrics, the researchers made the following discoveries about why these people weren’t inclined to make this purchase:

  • Those with greater risk aversion were less likely to purchase longevity insurance owing to its high upfront cost and uncertain payout.
  • Those with greater risk aversion and higher home equity were less likely to purchase longevity insurance owing to what they viewed as a more certain financial cushion in old age (i.e., their home).

It’s also possible that some of this reluctance to purchase longevity insurance could be attributed to concerns that problems could arise with the insurer agreeing to honor the terms of the policy despite the sizeable outlay by the policyholder. Indeed, firsthand experience with claim denials under long-term care policies, which happen with unfortunate regularity, make this a distinct possibility.

It will be interesting to see how many prove willing to take the plunge with longevity insurance in the coming years …

Source: The Wall Street Journal, “Is Longevity Insurance Too Risky,” Simon Constable, October 23, 2016

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