DanielLC comments on Why is it rational to invest in retirement? I don't get it. - Less Wrong
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I wonder if there are any death insurance companies, where you give them your retirement savings, and when you retire they pay you money continuously until you die. That way, they can pay you extra to take into account that you might not live that long.
The question is how much you care about that person. Does having a worldline connecting you matter regardless of length? Does it matter at all? Do you care about them inversely to their chronological distance to you? There's not a particular rational answer. It's just a question of your values.
The "death Insurance" you propose is called an annuity. It's a very standard and common product. However in practice it is almost always a bad investment. You get higher returns at less risk in an index fund with a large bond component. There may be very special cases where it makes sense for very wealthy individuals, with particular tax or estate issues, but for most of us an annuity is a ripoff.
That article is about deferred annuities which when used correctly are basically a tax-advantaged retirement account. There are lots of kinds of deferred annuities, some of which are gimmicky, all of which charge some fees to capture some of the tax subsidy.
Immediate annuities are "death insurance."
There's no reason in principle it has to be a bad investment. What's stopping banks from lowering prices to compete against each other?
Banks need to make money on their products. Instead of offering annuities they could just put that money into the stock market* . So they need to make as much as they would in an index matching fund plus operating expenses plus a profit.
So their actuary says, "this guy will (statistically speaking) live another 23.2 years. If we pay him x dollars a month, we'll break even on his premiums". And the actuary's boss says, ok, pay him x-.12x.
Banks could compete on that -12%, but only so far. The cost of administering the program, plus profit is the friction, the waste that you're losing out on, and it's usually far more than the risk you're mediating by not putting it all in an index fund.
Basically, the bank is an unnecessary middleman. But a) they've got good salespeople and b) most people don't control their money optimally, so the waste of annuity may be less than the waste an undisciplined investor may make.
*This is an oversimplification, there are issues of risk diversification, and probably some laws about where banks invest their money.
Can you explain further?
If that's an honest question, you'll need to be more specific.
When I asked that, it just said "actuaries". Based on the time of the last edit, I can only assume that you edited it before I actually posted.
They're not mutually exclusive. I would assume they'd invest the money they're holding. I guess it needs to be a little more complicated if you add that you don't mind a chance of them losing some of your money, but it can still be done.
Yes, sorry, I realized quickly after I posted that "Actuaries" was both inaccurate and unhelpful.
And it's much more complicated.
Yes; they are called annuities (well, some types of annuities work this way).
Wait annuities are tontines? Cool.
Not precisely tontines. For variable annuities, your return depends much more on the market (highly unpredictable) than on the deaths of other members (highly predictable, in aggregate). For fixed annuities, of course, your return is fixed.
Longevity insurance is available from several insurance companies.
Is it a good idea to give a financial incentive to a big company to make your life shorter?
If after the moment you buy your insurance you make some changes that increase your expected life span (e.g. give up smoking), can you be sued for insurance fraud?
This depends partly on the terms of the insurance and partly on the laws. I work as an actuary and at the moment our company's rules are:
We don't sell any policies which are more expensive for people who are less likely to die (such as pure endowments), but even if we did, I find it hard to imagine that we'd offer lower price for smokers. That would be pretty bad marketing - "insurance company XY motivates their clients to smoke" makes for a pretty diappointing headline. Suing a client for quitting smoking? Unthinkable.
By the way, if I decide to invest in my retirement, I'd want to buy pure annuity without any guarantee or death insurace; I'll need the money if I survive to old age. Unfortunately I don't even know whether such products are ever sold, people clearly prefer to have a guaranteed 10 year annuity or fund transfer to their heirs in case of death or whatever similar, since they are now certain that the insurance company doesn't consume their savings if they die. But it makes the insurance significantly more expensive and most of the advantage the insurance has over bank savings is lost.