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Real Longevity Insurance with a Deductible: Introduction to Advanced-Life Delayed Annuities (ALDA)

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  • Moshe Milevsky

Abstract

This paper explores the financial properties of a concept product called an advanced-life delayed annuity (ALDA). The ALDA is a variant of a pure deferred annuity contract that is acquired by installments, adjusted for consumer price inflation, and pays off toward the end of the human life cycle. The ALDA concept is aimed at the growing population of North Americans without access to a traditional defined benefit (DB) pension plan and the implicit longevity insurance that a DB plan contains. I show that under quite reasonable pricing assumptions, a consumer can invest or allocate $1 per month, while saving for retirement, and receive between $20 and $40 per month in benefits, assuming the deductible in this insurance policy is set high enough. The ALDA concept might go a long way in mitigating the psychological barrier to voluntary lump-sum annuitization.

Suggested Citation

  • Moshe Milevsky, 2005. "Real Longevity Insurance with a Deductible: Introduction to Advanced-Life Delayed Annuities (ALDA)," North American Actuarial Journal, Taylor & Francis Journals, vol. 9(4), pages 109-122.
    • Handle: RePEc:taf:uaajxx:v:9:y:2005:i:4:p:109-122
    DOI: 10.1080/10920277.2005.10596229
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    Cited by:

    1. Olivia S. Mitchell, 2018. "Enhancing risk management for an aging world," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 43(2), pages 115-136, September.
    2. Vanya Horneff & Raimond Maurer & Olivia S. Mitchell, 2023. "Fixed and Variable Longevity Annuities in Defined Contribution Plans: Optimal Retirement Portfolios Taking Social Security into Account," NBER Working Papers 30853, National Bureau of Economic Research, Inc.
    3. Huaxiong Huang & Moshe A. Milevsky & Thomas S. Salisbury, 2012. "A different perspective on retirement income sustainability: the blueprint for a ruin contingent life annuity (RCLA)," Papers 1205.2513, arXiv.org.
    4. Horneff, Wolfram & Maurer, Raimond & Rogalla, Ralph, 2010. "Dynamic portfolio choice with deferred annuities," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2652-2664, November.
    5. Gong, Guan & Webb, Anthony, 2010. "Evaluating the Advanced Life Deferred Annuity -- An annuity people might actually buy," Insurance: Mathematics and Economics, Elsevier, vol. 46(1), pages 210-221, February.
    6. Holzmann, Robert, 2015. "Old-Age Financial Protection in Malaysia: Challenges and Options," IZA Policy Papers 96, Institute of Labor Economics (IZA).
    7. Alicia H. Munnell & Gal Wettstein & Wenliang Hou, 2022. "How best to annuitize defined contribution assets?," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 89(1), pages 211-235, March.
    8. Wolfram J. Horneff & Raimond H. Maurer, 2008. "Deferred Annuities and Strategic Asset Allocation," Working Papers wp178, University of Michigan, Michigan Retirement Research Center.
    9. Raimond Maurer & Olivia S. Mitchell & Ralph Rogalla & Vasily Kartashov, 2013. "Lifecycle Portfolio Choice With Systematic Longevity Risk and Variable Investment—Linked Deferred Annuities," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(3), pages 649-676, September.
    10. Liu, Yanxin & Li, Johnny Siu-Hang, 2018. "A strategy for hedging risks associated with period and cohort effects using q-forwards," Insurance: Mathematics and Economics, Elsevier, vol. 78(C), pages 267-285.
    11. Leiser, David & Azar, Ofer H. & Hadar, Liat, 2008. "Psychological construal of economic behavior," Journal of Economic Psychology, Elsevier, vol. 29(5), pages 762-776, November.
    12. Warshawsky, Mark, 2015. "Reforming Retirement Income: Annuitization, Combination Strategies, and Required Minimum Distributions," Working Papers 06834, George Mason University, Mercatus Center.
    13. Barbara Chambers & Ruth Walker & Jun Feng & Yuanyuan Gu, 2021. "The silver tsunami: an enquiry into the financial needs, preferences and behaviours of retirees," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(1), pages 645-687, March.
    14. Norma L. Nielson, 2012. "Annuities and Your Nest Egg: Reforms to Promote Optimal Annuitization of Retirement Capital," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 358, August.
    15. Horneff, Vanya & Maurer, Raimond & Mitchell, Olivia S., 2018. "Putting the pension back in 401(k) retirement plans: Optimal versus default longevity income annuities," CFS Working Paper Series 607, Center for Financial Studies (CFS).
    16. David Blanchett & Branislav Nikolic, 2023. "Historical pricing variability in immediate and deferred income annuities," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 26(2), pages 271-280, July.
    17. Annamaria Olivieri & Ermanno Pitacco, 2022. "Time Restrictions on Life Annuity Benefits: Portfolio Risk Profiles," Risks, MDPI, vol. 10(8), pages 1-18, August.
    18. Ermanno Pitacco, 2016. "Premiums for Long-Term Care Insurance Packages: Sensitivity with Respect to Biometric Assumptions," Risks, MDPI, vol. 4(1), pages 1-22, February.
    19. Horneff, Vanya & Maurer, Raimond & Mitchell, Olivia S., 2020. "Putting the pension back in 401(k) retirement plans: Optimal versus default deferred longevity income annuities," Journal of Banking & Finance, Elsevier, vol. 114(C).
    20. Holzmann, Robert, 2014. "Old-age financial protection in Malaysia : challenges and options," Social Protection Discussion Papers and Notes 92725, The World Bank.

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