June 26 , 2007. Copyright © 2007, Greenwich Financial Management Inc., a registered investment advisor. 

How Long Will You Live?

Americans on average are living longer than predicted by existing mortality tables. Let us dub this trend The New Longevity.

A trend toward lower mortality rates has been evident in every decade of US census data since the 1880’s. (See, for a summary table, InfoPlease Almanac online.) But the speed of the apparent recent drop has taken even industry actuaries by surprise.

The latest evidence comes from the “Report of the Individual Life Experience Committee” concerning mortality experience (deaths of insurance policy owners) between 2002 and 2004, which was compared with prior experience between 1996 and 2001, as reflected in the industry standard actuarial tables, called Valuation Basic Tables (VBT). The Society of Actuaries compiled data from a list of insurance companies, 31 of which contributed data for both study periods. Society of Actuaries Report

Here are the results: overall deaths in the current period came in at only 88% of the rate predicted by the very recent VBT data. Even more strikingly, if adjusted for larger policy sizes, deaths came in at only 63% to 68% of expected rates!

The Report attributes the lower death rates associated with larger policy sizes to increased medical scrutiny by insurers in issuing larger policies. Sociological factors may prove equally important. Those seeking and able to obtain large insurance policies are wealthier and better educated than average. More educated people tend to follow healthier life styles, to get better medical care and to live longer. See, for example, “A Surprising Secret to a Long Life: Stay In School," New York Times, 1/3/2007)

The remarkable decline in measured mortality rates will in due course lead to lower premium payments for new life policies. With mutual insurance companies, the lower cost of mortality could create economic benefit ultimately shared with policy holders through the dividend process. Some stock companies might elect to reduce premiums on existing universal life contracts based on improved mortality experience, as Pacific Life in particular has done from time to time.

A beneficiary of the New Longevity: issuers of life insurance contracts. A potential victim of the New Longevity: issuers of lifetime annuity contracts.

A second class of victims: investors in pools of life insurance policies, called “life settlements,” “investor owned life insurance” or “stranger-owned life insurance.”

A searching question: is your financial plan truly adequate to cover a lifespan that may stretch much longer than you are currently expecting? Could you face a pinch? It may be shrewd, in this context, for individuals to consider, as part of their retirement planning, so-called “lifetime annuities,” whether fixed or variable. We will in future articles lay out the pros and cons of such instruments. We will also discuss tools to analyze whether on balance you are spending too much on life insurance relative to annuities or to your expected lifespan.

Andrew Szabo CFA is managing director of Greenwich Financial Management Inc., a registered investment advisor.  Questions call 203-531-2877 or e-mail Szabo@GreenwichFinancial.com.  Previous issues may be found at www.GreenwichFinancial.com