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  #1  
Old 09-28-2006, 09:38 AM
Mirza Mirza is offline
 
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Default The need for pure endowment insurance

I am studying module two of FAP online course. Right not I am reading about demographics, aging population, and the risk of outliving one's finances in the retirement years.

It has occured to me that pure endowment insurance would be a perfect solution for dealing with the risk of outliving your finances in old age. A person could do financial planing assuming to live no more than age 90 for example, and then buy pure endowment at 90 just in case she outlives that assumption.

Now I know that pure endowments are illegal, but I am interested in what do other people here think about this idea.
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Old 09-28-2006, 09:43 AM
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Carol Marler
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Originally Posted by Mirza View Post
I am studying module two of FAP online course. Right not I am reading about demographics, aging population, and the risk of outliving one's finances in the retirement years.

It has occured to me that pure endowment insurance would be a perfect solution for dealing with the risk of outliving your finances in old age. A person could do financial planing assuming to live no more than age 90 for example, and then buy pure endowment at 90 just in case she outlives that assumption.

Now I know that pure endowments are illegal, but I am interested in what do other people here think about this idea.
Rather than a pure endowment, make the benefit a life annuity deferred to age 90. Products similar to this are actually available in the real world, although age 90 sounds a bit high.
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Old 09-28-2006, 09:52 AM
Mirza Mirza is offline
 
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Rather than a pure endowment, make the benefit a life annuity deferred to age 90. Products similar to this are actually available in the real world, although age 90 sounds a bit high.
If I am not mistaken, if the policy holder dies before the anuity comes into the effect, premiums are usually refunded, or there is some kind of benefit payble at death. That would make an annuity more expensive than a pure endowment in which you get nothing if you die before a certain age. Is that correct?
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Old 09-28-2006, 09:56 AM
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Carol Marler
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If I am not mistaken, if the policy holder dies before the anuity comes into the effect, premiums are usually refunded, or there is some kind of benefit payble at death. That would make an annuity more expensive than a pure endowment in which you get nothing if you die before a certain age. Is that correct?
True for traditional annuities, although group products without a pre-retirement death benefit are not unheard of.

I would think that the structured retirement planning products probably limit the death benefits, but I have only heard about them in passing, so I'm not really an expert on the subject.
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Old 09-28-2006, 12:57 PM
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Now I know that pure endowments are illegal, but I am interested in what do other people here think about this idea.
I wonder how many insurance companies murdered their pure endowment policyholders with scant minutes to spare.
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Old 09-28-2006, 01:45 PM
Steve Grondin Steve Grondin is offline
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I wonder how many insurance companies murdered their pure endowment policyholders with scant minutes to spare.
Anecdotally, fewer than stranger-owned life insurance related deaths, but hey, stoli's legal.

While PE's might be OK longevity protection, you would need a series of them to handle the risk to 95, then to 100, etc. Which looks supsiciously like a life annuity. Hmmm.
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Old 09-28-2006, 02:22 PM
Mirza Mirza is offline
 
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Originally Posted by E. Blackadder View Post
I wonder how many insurance companies murdered their pure endowment policyholders with scant minutes to spare.
Anecdotally, fewer than stranger-owned life insurance related deaths, but hey, stoli's legal.

While PE's might be OK longevity protection, you would need a series of them to handle the risk to 95, then to 100, etc. Which looks supsiciously like a life annuity. Hmmm.
Yeah it could be an annuity, or annuity payment option for pure endowment benefit. As long as insured gets nothing if he dies before an endowment date. If you have any kind of death benefit before an andowment date, than you have a regular life insurance policy, and that does not insure you against longevity now does it? You are basically insuring against a single event of living too long.

I think market for such a product could be huge. It could be built into 401K or some other pension saving scheeme.

Last edited by Mirza; 09-28-2006 at 02:27 PM..
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Old 09-28-2006, 05:37 PM
Steve Grondin Steve Grondin is offline
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I agree the no DB during the deferral period is ideal for addressing the longevity risk. You can make one of these for yourself through the combination of 1) Immediate life annuity w/ period certain to age longevity protection is desired to start 2) Loan to help buy 1) that has payments that equal payments from 1) until age longevity protection is desired to start.

What you'd be fighting, of course, would be any interest rate differences that would exist between 1) and 2), and tax consequences.
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Old 09-29-2006, 04:26 AM
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Incredible Hulctuary Incredible Hulctuary is offline
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Originally Posted by Steve Grondin View Post
I agree the no DB during the deferral period is ideal for addressing the longevity risk. You can make one of these for yourself through the combination of 1) Immediate life annuity w/ period certain to age longevity protection is desired to start 2) Loan to help buy 1) that has payments that equal payments from 1) until age longevity protection is desired to start.

What you'd be fighting, of course, would be any interest rate differences that would exist between 1) and 2), and tax consequences.
But then you wouldn't be getting the higher return from mortality.

A better way if you want to take the risk of getting little or nothing if you die early in exchange for getting more if you live, would be to buy an immediate life annuity with no period certain starting at some retirement age (say 60) and invest all the proceeds until you reach the target age (say 85). With the first life annuity you get the mortality benefit, then once you reach the higher age you buy another annuity with the investment results or take a lump sum if you think you don't have much longer to live.
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Last edited by Incredible Hulctuary; 09-29-2006 at 08:44 AM..
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Old 09-29-2006, 09:16 AM
Steve Grondin Steve Grondin is offline
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But then you wouldn't be getting the higher return from mortality.
Actually, what I described (in the theoretical world assuming matching interest rates, absent loads/sales charges/taxes) would be exactly a life annuity starting at "longevity age" with no DB prior to that. You would lose the entire investment if you die prior to that longevity age (because commuted value of future gtd pmts from life & period certain annuity would equal the loan balance remaining).

I'm not sure how what you propose risks everything on early death. You would still have the investment proceeds even if you died prior to 85.
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