What Longer Life Expectancy Means For Your Money
Americans are living longer. Financial professionals and government officials realized this some years ago and have been studying what that means. Many individuals, however, are not aware of the significant changes in longevity and what it means for their finances.
Longer Life Expectancy means longer retirements. Men who are 65 today will live on average another 20 years. That means half that group will live more than 20 years and is why people over age 80 are the fastest-growing segment of the population. In their planning, most people should assume at least once spouse will live until at least age 90.
With retirement routinely lasting 20 years or longer, various ways to pay for retirement must be considered.
Some people will opt to work longer. In the last few years the average retirement age crept up a bit, after declining steadily for decades. Recent surveys indicate that many Baby Boomers plan to continue working at least part-time to age 70 or longer. Some will need the money. Others will be too active and healthy to stop working.
Other strategies are to save more and invest more aggressively for higher returns.
Also overlooked is the effect on insurance products.
The good news is that life insurance premiums are falling. Premiums have declined for several years, and the Insurance Information Institute forecasts that they will drop another 3% next year.
The savings are dramatic. According to III, 10 years ago a 40-year-old male nonsmoker qualifying for a standard rate would have paid a $1,050 annual premium for $500,000 of 20-year term coverage. In 2004, the premium was $715, and it was $660 in 2005. The III expects the average premium will be $641 in 2006. Interestingly, the preferred rates, those for the healthiest policyholders, have been flat the last couple of years while standard rates have declined. Preferred rates also should decline in 2006.
Longer life expectancies are not the only reason for premium declines. Competition and more efficient operations also are causing the price decreases. Consumers also are shifting to term life from whole life. About half of policies today are term, instead of one third in 1998.
Higher interest rates also should reduce premiums next year by increasing the investment returns of the insurers’ portfolios.
Premiums would fall even farther, but state regulators increased the reserve requirements insurers must maintain.
Because of these trends, consumers who have existing life insurance policies should shop around and consider new policies. The older your policy is, the larger your potential savings. Check the Links and Tools section of the members’ web site for links to web sites that allow you to compare premiums at different insurers.
The flip side is that annuity payouts are declining. When an insurer promises payments for life, it has to make lower payments if it expects people to live longer. People who “annuitize” by selecting fixed payments for life can expect lower annual payments than they would have received five or 10 years ago.
As with life insurance, there is more than one factor at work. Lower interest rates and the end of the equity bull market also have cut insurers’ payout levels. There is no doubt, however, that insurers have factored longer life expectancies into their computations of annuity payouts.
Government programs also are affected by longevity.
The Social Security normal retirement age already is scheduled to increase for the later Baby Boomers. The normal retirement age might be increased again or benefits reduced in some other way.
Medicare is in even worse shape than Social Security. There already is a plan to reduce benefits through means-testing (see page six of this issue). Other reductions might be on the way.
