The Perfect Retirement Investment Nobody Wants: This article discusses a financial product idea that aims to address two significant retirement risks related to health. These risks are contradictory, but both pose challenges. One is the possibility of needing expensive long-term care early in retirement, which could deplete one’s savings. The other is the prospect of living a long and healthy life, resulting in the exhaustion of retirement savings due to longevity.
Around two decades ago, economist Mark Warshawsky proposed a solution to mitigate these risks through a single product. He suggested combining long-term care insurance with an annuity – a financial instrument that provides a steady stream of payments for life, similar to Social Security. This hybrid product would be priced lower than if each insurance product were purchased separately, as the risks of one would offset the risks of the other. If an individual requires substantial long-term care early on, they might not live long enough to benefit from annuity payments, and vice versa fully.
However, despite the potential benefits of this hybrid product, it has yet to gain much traction in the market. Insurers often worry about adverse selection, attracting higher-risk customers while deterring lower-risk ones. For example, people with health issues might only apply for long-term care insurance if they disclose their conditions, raise premiums and discourage healthier applicants. On the other hand, annuities can attract individuals who anticipate a long life, leading to higher annuity premiums.
The Perfect Retirement Investment Nobody Wants
Warshawsky’s hybrid solution could minimize adverse selection, as individuals would only seek this double-sided protection if they perceived the risks to be balanced for themselves. This would reduce the need for extensive medical exams and histories during application, making the product more accessible. Warshawsky calculated that around 98% of 65-year-olds would be suitable candidates for this hybrid product.
Despite the potential advantages, the concept has faced resistance from insurance companies. Some speculate that people might have a weak affinity for either insurance product, making a hybrid of the two less appealing. Additionally, there is a general hesitancy to commit to financial products that involve significant upfront costs.
The article also mentions that some financial professionals admire the concept but believe combining these insurance types may not change people’s reluctance to embrace long-term rational risk management. Even though newer and more standardized annuity products exist, mistrust of insurance companies and a desire to retain control over funds remain concerns.
Conclusion
In summary, the article explores the idea of a hybrid insurance product that aims to mitigate the risks of early long-term care and outliving retirement savings. Despite its potential benefits, various factors, including people’s aversion to traditional insurance products and reluctance to commit substantial funds, have hindered the widespread adoption of this innovative solution.
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