Advisors may be surprised to learn that some clients are thinking about their own mortality even as they consider whether to buy annuities with living benefits.
Ruark Consulting says it has found that the mortality of people who buy variable annuities with guaranteed living benefits runs about 12 percent lower than that for people who buy variable annuities without those guarantees.
So the living benefit crowd actually tends to live longer than the other variable annuity buyers.
No one is saying that the trend reflects a self-fulfilling prophecy or that it reflects a tendency of advisors to avoid selling living benefit products to less healthy people. Still, the relationship between a long life and buying living benefit products is certainly a tantalizing one for advisors to explore.
The finding is based on a survey of 17 major insurers representing more than 30 million policy years of exposure and 340,000 deaths between January 2007 and December 2011, according to Ruark.
The researchers found a similar 12 percent differential in mortality levels when it conducted its first variable annuity mortality study, which came out in 2007. That means the trend has continued from before the great recession on through the end of last year.
Heads up for advisors
The heads up for advisors is that people who tend to buy variable annuities with living benefit guarantees are likely to have an expectation that they will live a long life, says Peter Gourley, a vice president at Ruark.
It correlates with client concern about outliving retirement savings, he says. That can be a talking point during the planning discussion.
A. J. Block, an independent advisor with Carter Financial Management, Orchard Park, N.Y., says he has noticed that client decisions about electing a living benefit are often impacted by the client’s own sense of how long he or she expects to live.
In fact, he says, it is the first decision they make. “That is, if they think they will live a long time, they will consider that in deciding whether to buy annuities and life insurance, and whether to choose products with guarantees.”
Of course, “most people, when they are younger adults and unless they have a medical condition, think they will live forever,” Block says with a smile. “It’s when they get older, say in their 60s, when they start factoring mortality into their decisions. But even then, most think they will live 20 years or more.”
The second decision
<p> Another factor impacting client purchase of annuities with guaranteed living benefits is what Block calls “the second decision.” This is the decision to compare the annuity with what the client can earn elsewhere, on a guaranteed basis, in today’s low interest rate environment.
Interest rates are so low today that certain clients think it’s time to get into an annuity that will guarantee benefits in the future, the registered rep explains.
Back in the 1980s and 1990s, interest rates were so high, people wouldn’t even look at annuities, he recalls. They would say, “Why would I ever want that, when I can earn more elsewhere?” He remembers how people turned away from annuities earning 5 percent to 7 percent internally, because they thought the higher rates they found elsewhere would go on for a long time. They didn’t imagine anything else.
That sense of going on for a long time is a factor today as well, he says, but in reverse. Today, the best interest rate a person can get elsewhere is 1 percent or maybe 2 percent, he explains. So now people tend to think that these very low interest rates will just continue on and on. This may sound irrational to financial people, but that’s what certain clients think and expect, Block says.