Insurance issues: Ups and downs of living longer
Here’s the good news: We’re living longer than ever before. According to the U.S. Centers for Disease Control and Prevention, life expectancy at birth in the United States rose to an all-time high of 78.2 years in 2009.
The bad news? The longer we live, the more complicated our insurance planning becomes.
“The way you think about financial planning is obviously impacted by how long you think you will live,” says Faye Albert, a life insurance actuary and member of the Mortality Committee for the Society of Actuaries.
Albert says the primary market being affected by increased longevity is life insurance. Longer life means many consumers are becoming less concerned with making sure their families are provided for and more concerned with quality of life in old age.
“If you are going to live a long time,” she says, “you will probably be using more of your assets to pay for your living expenses as opposed to putting them into assets you want to pass on.”
Steadily increasing longevity has led to one of the fastest-growing segments of the insurance market — long-term care. According to experts, long-term care insurance has become an increasingly popular option for consumers in the past decade, with about 8 million in the United States currently holding long-term care insurance policies.
Murray Gordon, a long-term care planning specialist, says earlier generations used to think of long-term care only as it related to one day paying for a nursing home. Today, consumers are living longer and need to carefully consider the array of associated costs — not just nursing home care.
“Thirty years ago, only a handful of companies were offering (long-term care) policies,” Gordon says. “They didn’t know how to price it, didn’t know how to underwrite it. But they’ve learned, and consumers need to be on top of this now more so than ever before.”
According to the National Advisory Center for Long Term Care Insurance, 7.3 million Americans needed long-term care in 1994 at an average cost of about $40,000 a year. That figure rose to 9 million in 2000 at an average annual cost of $55,000. By 2030, it’s projected that 23 million Americans will require long-term custodial care at a cost nearing $300,000 per person each year.
“Longer life means an increased chance of things like stroke, multiple sclerosis, Parkinson’s, Alzheimer’s — all the stuff that affects people over 65,” Gordon says. “You don’t want to wait until you’re faced with those things before considering long-term care insurance.”
That being said, Raquel Lorenzo Murphy — a life, disability and long-term care insurance specialist at HUB International — says increased longevity also has resulted in people buying life insurance (mostly on the term side) later in life.
“It was unheard of not too long ago for a 50-year-old to be able to purchase a 30-year term policy,” Murphy says. “Now it’s a common product offering among the top-rated life insurance carriers.”
Another increasingly popular option for insurance consumers comes in the form of annuities. For instance, The Hartford recently started offering a life insurance policy rider (add-on) that provides at least eight years of income to someone covered by its policy who lives to at least age 90.
Consumers who want death benefit protection can buy a universal life insurance policy with The Hartford’s new Longevity Access Rider, giving applicants the option to pay a little extra every month and add the rider. Should they live to age 90, they’ll be able to withdraw a monthly amount equal to as much as 1 percent of their death benefit. For example, someone with a $500,000 policy could receive up to $5,000 a month for eight years.
“There used to be a very small gap between retirement and longevity, maybe five or six years,” says Anand Rao, a principal with accounting firm PricewaterhouseCoopers’ Diamond Advisory Services. “Now it’s a couple of decades, and they need to consider how to generate a consistent income.”
Albert, the life insurance actuary, says deferred annuities like the one offered by The Hartford are growing in popularity, but they aren’t necessarily for everyone. Annuities put the investment power in the hands of an insurance company, and some people may be more comfortable investing that money themselves.
“A lot of people think they can invest at a better rate than the insurance companies,” Albert says. “But, in fact, as people are living longer, it could be a good idea for them to purchase a policy with an annuity option so they know they’ll have money on a monthly basis for as long as they live.”
Rao says the future of health insurance inevitably will be tied to the importance of a person’s attention to preventive health care.
“If you are going to the gym three days a week, eating healthy foods and making the right lifestyle choices, these will all count as specific incentives to bring down your health insurance premiums,” Rao says. “The underwriting process is changing, and it’s going to change even more in years to come.”