From: David Don Ezra
To: Canadians facing Retirement
Date: September 27, 2018
Re: Longevity Insurance, an Idea for Our Times
With a large swath of babyboomers recently retired or set to retire, and many of them having placed their retirement wealth in capital accumulation plans, RRSPs not least, the time has come for governments to shift their attention to policies to help them efficiently and economically wind those plans down. Decumulation is the term of art.
The provision of longevity insurance is one essential component for making this happen.
Longevity insurance is simply the payment to an individual of a lifetime income stream commencing at some advanced age, in exchange for a lump sum purchase price paid by the individual some time earlier. For example, a person or couple in their mid-60s can buy a policy that will only pay out an income stream at age 85 or any advanced age they designate. Insurance becomes a pooling mechanism to provide for the financial strain of a long life less expensively than the alternative – the individual setting up a sufficient personal reserve to support life to an extremely advanced age.
But government policies hinder the provision of longevity insurance, by imputing investment income, and taxing it, even to those who do not reach the advanced age and therefore do not collect the insured income. And so Canadian insurers do not currently offer pure longevity insurance contracts on a stand-alone basis. Unbundling the pure longevity insurance from these financial products would make the stand-alone contract cheaper and more attractive. Such contracts are now available in the US, and are contemplated in a UK government report.
My recent C.D. Howe Institute report recommends that policymakers:
- Change the tax rules so that the same amount of aggregate tax is payable on pure longevity insurance contracts, but only by those who receive income. This makes it possible and practical for insurance companies to offer such products, thereby promoting innovation.
- Permit (but do not compel) the advanced age at which income payments start to be higher than 90, in order to substantially reduce the cost of such products.
- Permit (but do not compel) some amount of accumulated capital in registered retirement savings plans to be used for the purchase of these contracts, as in the US, without affecting minimum withdrawal rules.
- Once possible and practical, require capital accumulation plans like defined- contribution plans to offer partial stand-alone longevity insurance for voluntary member purchase at retirement.
- Invest in retirement planning education with respect to longevity risk protection, stressing enhanced potential consumption with confidence via guaranteed income, rather than using the word “annuity.”
- Work with insurance regulators to ensure that solvency rules for stand-alone, single premium longevity insurance contracts are adequate to protect both consumers and the industry. The rules should be such as to discourage over-aggressive pricing, but not so onerous that insurance companies face a greater burden than with their immediate annuities.
David Don Ezra is former co-chair, global consulting for Russell Investments, and a former Vice-President of the Canadian Institute of Actuaries.
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The views expressed here are those of the author. The C.D. Howe Institute does not take corporate positions on policy matters.