The Perfect Retirement Investment Nobody Wants, Part 2

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Readers were intrigued by my newsletter last Friday, “The Perfect Retirement Investment Nobody Wants.” It was about a concept, never realized, for a hybrid product combining long-term care insurance with an immediate annuity — a stream of monthly payments that begins right away and lasts as long as you live.

Some readers said such policies already exist. Not exactly, as I’ll explain. Others wanted to know when or where they could buy one. Nowhere right now. Many wrote about the challenges of trying to protect themselves and their families from the vicissitudes of either ill health or such good health that they outlive their savings.

The idea that appeared in a 2001 article by the economist Mark Warshawsky and two other scholars is that insurers could charge less for long-term care insurance and annuities by combining them, because the risks to the insurer would partly offset each other: If customers needed lots of long-term care early on in the policy, they probably wouldn’t live long enough to get a lot of annuity payments. If they lived long enough to suck up lots of annuity payments, it’s probably because they hadn’t needed much long-term care early in retirement. Insurers could offer the two protections together more cheaply than each one separately because of the offsetting risks — the hedge, in finance lingo.

In their vision, the premium for the hybrid coverage would be paid in full upfront and benefits could never be cut. People who were certified as needing long-term care would get a guaranteed bump-up in their monthly annuity rather than having to seek reimbursement for individual expenses such as nursing care.

I’ll share excerpts from emails I got about the plan and then give you some additional thoughts from Warshawsky and other experts.

Henning Sieverts of Norwich, England: “It’s a smart insight, but as formulated, never accessible to the bulk of any population. Most people have neither the wealth nor the income even to consider buying into such a scheme. The public sector, with or without involving not-for-profit social enterprises, is entirely capable of it efficiently and responsibly.”

Rebecca Bartlett of Brattleboro, Vt.: “Wow! As a recent retiree who tried a crystal ball, tea leaves and entrails and (probably) failed to make the right decisions on annuities and Medicare, I think the U.S. government is the right organization to enact the Warshawsky plan. That’s what government is for: to feed us our greens.”

Ethan Schwartz of New York City: “Savers may have a rational reason for not liking longevity annuities: The returns they offer are pretty skimpy. Today, the annual investment return on a longevity annuity that begins payments to a couple at age 80 is only 5.8 percent, and that’s only if one of them lives to age 100.”

Jim Pisula of Fort Collins, Colo.: “The insurance companies are their own worst enemies — the products are laden with fat commissions so agents push them heavily, they’re difficult to compare one against another, they require big chunks of money to start with, and they’re illiquid.”

Tom Wilson of Berlin, Md.: “I have long-term care insurance and so do my sister and a number of my friends. In each case, the insurance company has come back long after we initially purchased the insurance and either raised the rates or reduced the benefits. It’s like making a bet with someone and having them change the terms of the wager or the stakes retroactively.”

Henry Pashkow of Philadelphia: “I like broccoli and brussels sprouts, but I don’t like the insurance policies. Is this rational? Not to a rational economist (if there are any). But that’s me.”

All of those are valid points. People feel annuities and long-term care insurance are unnecessarily expensive. They worry that the insurers won’t be around to pay when they need the money. Some admit that they probably ought to have coverage, but for whatever reason don’t.

Cost is a particular concern. Only about one-third of households could afford a policy along the lines of the one in the 2001 article, assuming they could not tap more than half of the equity in their homes to pay for it, according to a 2007 article by Brenda Spillman and Christopher Murtaugh for the Office of Disability, Aging and Long-Term Care Policy in the U.S. Department of Health and Human Services. Spillman and Murtaugh were Warshawsky’s co-authors on the 2001 article.

Warshawsky told me that he heard from a lot of people after my newsletter came out, but not, alas, any insurers who wanted to offer the policy. I asked him about Spillman and Murtaugh’s piece, which he had not read. He said he wasn’t sure that the joint product would be as unaffordable as they estimated, though he did email me later that it would not be “suitable for low-income retirees who are covered by Social Security for the annuity and Medicaid for long-term care.”

I also asked Warshawsky about Rebecca Bartlett’s idea that the federal government should offer such a product. He said it would be hard to keep it from being politicized, with segments of the population fighting over who should be subsidized. “It would be great to introduce it in the private sector first and see if it works,” he said.

As for Ethan Schwartz’s argument that the return on annuities isn’t good, Warshawsky cited research by himself and others that found that plain-vanilla annuities — at least those that pay out immediately, rather than later in life — do pay a fair return based on expected longevity. “It’s not what you would get in the stock market,” he said. “These are like bond returns.”

Scott Olson, an insurance broker on Camano Island, Wash., who specializes in long-term care insurance, told me in an interview that several companies in addition to the one I mentioned, OneAmerica, offer hybrids of long-term care insurance and annuities. But as my article explained, the existing policies don’t have the natural hedge that’s built into the Warshawsky-Spillman-Murtaugh concept.

Likewise, some readers cited policies that combine life insurance with long-term care insurance. Those don’t have a natural hedge, either. The risks to the insurer are all loaded on one outcome: that the person will get sick and die young.

Long-term care insurance (coupled with longevity protection) is “an absolutely critical part of retirement planning,” but until recently it hasn’t been sufficiently available because many insurers that sold long-term care as a stand-alone product lost money by underpricing it, Chuck Goldman, a financial services adviser in Swampscott, Mass., told me. The number of long-term care policies sold annually fell more than 90 percent, to 57,000 in 2018 from 754,000 in 2002, according to a Treasury Department survey.

“There isn’t enough competition to make companies deliver the best products they can,” Goldman said. That clearly needs to change.

I have a computer science background and spent many years with the ill-fated congressional Office of Technology Assessment. Regarding your newsletter on the regulation of artificial intelligence, I worry that, in the absence of an organization like the O.T.A., we are letting so-called “autonomous applications,” like Teslas, be made commercially available without really assessing their safety or looking at the broader social and policy questions. The trucking industry is talking about autonomous 18-wheelers barreling down our freeways, for God’s sake. Technologists, economists, psychologists, social scientists and ethicists need to put their expertise together. And, as you point out, it needs to be an international effort. Learning on the fly can be hazardous to our health.

Fred Weingarten
Annapolis, Md.

“Once the N.H.S. arrived, if you were poor and you got sick, you weren’t on your own anymore. You were in a crowded waiting room full of other sick people.”

— “Cunk on Britain,” Episode 4: “Twentieth-Century Shocks” (2018)

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