Wednesday 28 December 2022

Bought some 'death insurance'

I don't have much 'life (and TPD) insurance' (only around $100K via my employer-sponsored superannuation fund, where my employer pays the insurance premiums - so it is 'free' cover) as our home is practically paid off and I have sufficient superannuation savings to provide for my dependents if I suddenly died. So I don't see any great need to insure against 'loss of life'.

I do have loss of income insurance - which would provide 85% of my income if I was temporarily and/or partially disabled (eg. a serious stroke, cancer or whatever). One policy is via my employer-sponsored superannuation fund and would pay out after a 6 months 'waiting period' (which my accumulated unused annual and long service leave would cover) for up to 2 years. I also have a private LOI policy that would pay out after a 2 year waiting period to age 65.

One thing I would like to insure against is longevity risk. I have sufficient superannuation that I should be able to sustainably withdraw my current after-tax income (indexed to inflation) from my superannuation without exhausting it before reaching 100 or so. But, being an atheist, I don't have any belief in an 'afterlife' (I expect it will be similarly unmemorable as my 'beforelife' was) so the closest thing I have to a comfort against the inevitability of mortality is the faint possibility that medical science *might* make some significant strides in life extension during the next three or four decades. So there is some *risk* that I might end up living past 100 (my great-Aunty lived to 105, and my paternal grandparents lived to 94, and my parents are both around 90 and reasonably healthy) -- and if there are any life extension treatments or medications available by 2060 I doubt they will be cheap or readily available.

So it is conceivable that I *might* need some extra income stream if I make it to 100 years old. Which brings us to the topic of 'death insurance' (ie. insuring against loss/deferral of death). It is actually known as a 'lifetime annuity' - which you can obtain by purchasing a policy from an insurance company. It promises to pay you a set amount for 'life' (ie. until you die).  The amount of payment received is obviously based on how much you initially pay, and the typical life expectancy for your gender and age at time of obtaining the policy. However, an 'immediate' lifetime annuity (which starts making payments immediately) provides quite a small income stream compared to the lump sum initially invested. And it is even smaller if you choose some optional features such as 1. iindexing (fully or partially) the income stream to inflation, 2. having a reversionary beneficiary (ie. if you die very young your spouse would continue to receive some income payments for the rest of their life).

A more interesting type of lifetime annuity for what I *need* is a 'deferred' lifetime annuity - where you pay the initial lump sum, but won't receive any income payments until/unless you reach a specified age (it is actually quoted for a number of years 'deferral period' from date of purchase until income payments commence). The longer the deferral period the less likely you will live long enough to receive payments (and the amount of payment can be boosted if you opt-out of having a reversionary benefit, and also no withdrawal benefit - ie. nothing at all will be paid out if you don't live for at least the deferral period. For some legal reason (in Australia - the rules seem to be different in the US, UK etc)  deferred lifetime annuities can only be purchases using superannuation money (it is treated as a private pension income stream). It seems to be only available from around age 60 (preservation age), and I'm not entirely sure if it can be purchased prior to 'retirement' or only using superannuation that is already  in 'pension phase'. Anyhow, I made the application and the rollover from my employer-sponsored superannuation fund just before my birthday (as the quote was only current until then - as the payment rates are based in life expectancy and current age, in whole years) to the insurance company providing the deferred lifetime annuity appears to have been processed, so I'm assuming that it was OK to purchase the deferred lifetime annuity using superannuation funds still in 'accumulation phase'.

The more unlikely it is that you will live long enough to receive any benefit the higher the income payments (if received) will be. I just purchased a $10,000 deferred lifetime annuity with a 40 year deferral period (so nothing will be paid out if I don't live to at least 100), that will, if I live past 100, start paying out approximately $55,000 pa (indexed to inflation) every year I live past 100. If I happened to live as long as my great-aunt the insurer would end up paying out $275,000 (in today's money) - which is a pretty good return on a $10,000 'investment'.

I do wonder what might happen if there is a medical breakthrough that extends lifespan by a decade or two -- there probably aren't currently too many lifetime annuity liabilities (compared to the number of life insurance policies) that it would be an immediate financial problem for insurance companies. But if lifespan started to climb significantly the annuity rates quoted for such deferred lifetime annuity policies might start to drop rapidly (or such insurance cover may no longer be available at all).

I'll admit the purchase of a deferred lifetime annuity with a 40 year deferral period is a significant 'long shot', but I figure that if I had simply left the $10,000 in my superannuation it would  have only provided about $400 pa of additional retirement income stream (ie about $1 per day) so I'm happy enough to fritter away the $10K on the prospect that I *might* live past 100. If I do make it to 100 it will be a nice 'birthday present', and if I don't make it to 100 I really won't care that I *wasted* $10K buying the deferred lifetime annuity ;)

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