Government policies need to change to make the instrument available on a stand-alone basis
More and more retired Canadians are facing the risk of outliving their wealth, and other traditional sources of income are becoming harder to rely on. With that in mind, it may be time to provide retirees easier access to an alternative type of insurance.
“Rather than wondering whether they will outlive their assets, retirees should be able to secure a lifetime income stream that kicks in if they outlive their life expectancy,” asserted a new report from the C.D. Howe Institute. “The provision of longevity insurance is an essential component for making this happen.”
According to author Don Ezra, longevity insurance works by having individuals pay small premiums over time into a so-called “longevity pool”; people can collect money from it when they survive past a certain age. Providing such products can be challenging because they would have to adhere to certain solvency rules, though Ezra noted that those can be avoided by not including guarantees that have associated reserve requirements.
However, Canadian insurers aren’t offering pure longevity insurance contracts as stand-alone products. As Ezra explains, longevity insurance acts like a deferred annuity, and the maximum age to which the commencement of a deferred annuity may be postponed for tax-sheltered savings has until recently been 85.
“[F]or a 65-year-old male (the typical case that is discussed), 85 is roughly equal to the future life expectancy,” he said. “It would fit the case for insurance much better if the probability of collecting were much lower, closer to only 10 percent. That would imply a higher starting age, at least 90, more like 95. And then the premium required would be much lower, because it would genuinely cover only the extreme cases.”
The higher the premium an individual pays for their deferred income, the greater the sense of regret they expect from losing it to an early death. That psychological barrier makes longevity insurance feel more like a gamble to Canadians. To get around that barrier, Canadian insurance companies don’t offer pure longevity insurance; instead, they add a guaranteed payment that’s at least equal to the premium paid in case the individual dies before the selected age.
“But it is important to note that bundling a return-of-premium feature (with or without interest) makes it more than a pure longevity insurance contract, and can be unnecessarily costly,” Ezra wrote.
While not all people would benefit from increased availability of longevity insurance — particularly those known to have below-average life expectancies, the very poor, and the extremely rich — Ezra noted that the vast majority of the population will have a potential need for the product.
To help make stand-alone longevity insurance more available, Ezra suggested that tax rules be changed to make it practical for companies to offer and innovate on them. He also recommended retirement-planning education with respect to longevity risk protection, require capital accumulation plans (once possible and practical) to offer partial stand-alone deferred annuities for members to purchase voluntarily at retirement, and for the industry and regulators to collaborate on a system of solvency rules for stand-alone, single premium deferred annuities.
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