Statistics show quite clearly that Canadians are living longer. While longevity sounds like a great benefit, living a long life can create unique financial challenges.
A couple of recent reports by the C.D. Howe Institute conclude that the increasing lifespan of Canadian retirees is creating a need for special, stand-alone longevity insurance.
Boomers aged 55 and older now are facing a retirement that could last 20, 30 years or even more. The danger of living a long life is that as you age and health care and other expenses increase you might just run out of your money.
Longevity among both men and women after age 50 has been significant. The average lifespan of men after age 50 has increased by 7.7 years since 1965 and 1.9 years over just the last decade. The increase for women has been slightly lower at 6.4 years gained, narrowing the traditional gap between the lifespans of women and men.
These extra years of life come with some costs such as pensions, health care, and other age-dependent expenditures.
âFor a person or couple relying primarily on a secure pension from a government employer, for example, this life span uncertainty may not matter much,â writes Don Ezra in his report on the need for longevity insurance for Canadians. âFor all others whose main sources of retirement income are not guaranteed for life, (it) matters a lot. Many retirees are concerned about outliving their savings and as a consequence they are living a lower retirement lifestyle than may be feasible out of a sense of precaution.â
Ezra says many retirees would be better off pooling the risk of outliving their savings with other retirees facing the same risks through longevity insurance.
âThe most frequently cited financial fear among retirees is outliving oneâs money,â Ezra writes. âIf you know how long you are going to live you can budget for it and draw down an appropriate amount each year from your assets. But longevity is uncertain and extreme longevity, though unlikely, could have large negative financial consequences. A rational solution is therefor to pay a small premium into a longevity pool, which then becomes available to provide money to those who live to extreme old age.â
Canadian insurers currently may offer longevity insurance bundled up with other products resembling either a term deposit or a term life insurance contract, both of which make it expensive and unattractive for consumers, Ezra writes in the report, advocating that longevity insurance should be offered on a stand-alone basis.
âUnbundling the pure longevity insurance component from these financial products would make the stand-alone contract cheaper and likely more attractive,â he says.
A form of pure longevity insurance is available in the United States and it is being recommended in the United Kingdom by a parliamentary committee. âIn both cases the form of this longevity insurance is exactly what has been described as pure longevity insurance: You collect if you survive to the advanced age specified; you lose your premium(s) if you do not,â Ezra says.
The Canadian Life and Health Insurance Association (CLHIA) says Canadian seniors generally want a combination of guaranteed income for life and more flexible draw-down options in retirement. It believes longevity insurance is a retirement income planning option that should be available to all Canadians and has made recommendations to governments.
âExpanding the shelf (of products) to include longevity insurance and delaying the age when such incomes would start requires changes to tax and pension laws but could make sense for some consumers,â says Ron Sanderson, Director, Policyholder, Taxation and Pensions with the CLHIA. âMaking sure consumers have flexibility and advice to design appropriate income stream for their own circumstances is essential.â
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.