Using Life Insurance to Meet Income and Bequest Goals in Retirement - - PowerPoint PPT Presentation

Efficient Retirement Portfolios:

Using Life Insurance to Meet Income and Bequest Goals in Retirement

Kristen Moore Nick A Halen Keira Dong Presenter: Qinglai (Patrick) Zeng

Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement

Acknowledgement

´This project is part of the Industry Partnership Program (IPP) at the University of Michigan ´The authors gratefully acknowledge the support of the Society of Actuaries under the Center of Actuarial Excellence Grant as well as New York Life for their participation in the IPP.

Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement

Competing Objectives in Retirement

´Retirees face significant financial risk and competing financial objectives

– Income – Bequest

Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement

Partial Literature Review

´Using life annuities to manage income risk

– Chen and Milevsky (2003); Milevsky et al. (2006)

´Using life insurance to maximize probability of reaching bequest goal

– Milevsky et al. (2014, 2015)

´Portfolios with traditional investments, life annuties, and life insurance in terms of several metrics related to income and bequest or legacy

– Pfau (2014)

Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement

Life Insurance can be a source of retirement income in addition to a source of protection – Life Insurance Retirement Plans (LIRPs)

Pre-Retirement Premiums Premiums Supplemental Retirement Income Death Benefit

Beneficiaries

Your Retirement years

AND

Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement

Our Contribution

´ We examine the potential of life insurance to meet both income and bequest needs in retirement

– Life Insurance Retirement Plans (LIRPs)

´ Among financial advisors, opinions about LIRPs are mixed ´ We contrast retirement portfolios that include a LIRP with those that include only investment products ´ We simulate market scenarios and demonstrate that inclusion of a LIRP can improve financial outcomes in retirement

Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement

NYL’s Custom Whole Life Product (CWL)

´ CWL is a permanent life insurance product that pays dividends ´ NYL’s CWL is the first whole life insurance product that lets policyholders select how long they pay premiums and is designed to maximize the cash value accumulation in the policy ´ The cash value accumulation in a permanent life insurance policy grows tax-deferred ´ Retirees generally have tax-free access to their policy cash value, and can use partial surrenders and policy loans to supplement their retirement income

Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement

Model Overview

´Project all possible combinations of traditional assets (stocks and bonds) and non-traditional assets (Custom Whole Life) ´Run Monte Carlo simulations through 250 market scenarios ´Calculate the income risk and legacy potential ´Compare the performance of the resulting portfolios

Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement

Projecting All Combinations of Traditional Asset Portfolio and CWL

Custom Whole Life Traditional Asset Allocations

• 16 retirement income

withdrawal years

• 6 face amounts
• Total 96 possible CWL

products

• 4 x 96=384 possible

allocations for each age

• Calculate income risk

and legacy potential for each of the 384 product combination

• We project three issue

ages 35, 45 and 55

Stock Bond Stock Bond Stock Bond Stock Bond Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement

Measures of Portfolio Performance

´Income Risk: the probability of running out of money after retirement

– The income risk metric incorporates investment risk, longevity risk, withdrawal rate risk, inflation risk and sequence of returns risk. – In 250 scenarios, how often were income sources depleted before the 75th percentile of longevity

´Legacy Potential: the remaining asset upon death plus death benefits

– In 250 scenarios, what was the traditional asset fund balance plus death benefit at the 50th percentile of longevity?

´Efficient Portfolios

– Minimize income risk while maximizing legacy potential

Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement

Results

• 1. CWL can help improve retirement portfolio

performance

• 2. CWL policy with larger face amounts can be more

beneficial

• 3. Withdrawal strategies for CWL policy
• 4. CWL adds value at all issue ages. In our simulations,

effect was most pronounced at age 45.

Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement

Value of CWL in retirement portfolios

Conservative Moderate Balanced Growth Aggressive

200000 400000 600000 800000 1000000 1200000 0.00% 5.00% 10.00% 15.00% 20.00% 25.00%

Legacy Potential Income Risk

Age 55

conservative moderate balanced growth aggressive without CWL EIF

With CWL EIF Without CWL EIF Conservative Moderate Balanced Growth Aggressive

200000 400000 600000 800000 1000000 1200000 0.00% 5.00% 10.00% 15.00% 20.00% 25.00%

Legacy Potential Income Risk

Age 55

conservative moderate balanced growth aggressive without CWL EIF

Conservative Moderate Balanced Growth Aggressive New Growth New Aggressive

200000 400000 600000 800000 1000000 1200000 0.00% 5.00% 10.00% 15.00% 20.00% 25.00%

Legacy Potential Income Risk

Age 55

conservative moderate balanced growth aggressive without CWL EIF

Conservative Moderate Balanced Growth Aggressive New Growth New Aggressive

200000 400000 600000 800000 1000000 1200000 0.00% 5.00% 10.00% 15.00% 20.00% 25.00%

Legacy Potential Income Risk

Age 55

conservative moderate balanced growth aggressive without CWL EIF

Conservative Moderate Balanced Growth Aggressive New Growth New Aggressive

200000 400000 600000 800000 1000000 1200000 0.00% 5.00% 10.00% 15.00% 20.00% 25.00%

Legacy Potential Income Risk

Age 55

conservative moderate balanced growth aggressive without CWL EIF

Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement

12

Larger Face Amount can be more Beneficial

600000 700000 800000 900000 1000000 1100000 1200000 0.00% 2.00% 4.00% 6.00% 8.00% 10.00%12.00% 14.00% 16.00%18.00%

Legacy Potential Income Risk

age55 FA analysis

FA 100k FA 160k FA 220k FA 280k FA 340k FA 400k without CWL

face amount 400k is better than other face amounts

Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement

13

Longer withdrawal years reduce income risk at a sacrifice of legacy potential

600000 700000 800000 900000 1000000 1100000 1200000 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00%

Legacy Potential Income Risk

Withdraw Year Analysis

WY 10,11,12 WY 13,14,15 WY 16,17,18 WY 19,20,21 WY 22, 23, 24, 25 Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement

14

Issue Age Initial Asset Face Amount Premium Burden Lowest Income Risk Largest Legacy Potential Without CWL With CWL Without CWL With CWL 35 50k 100k 67.63% 14.4% 13% 1,144,719 1,208,479 45 200k 200k 44.30% 11.6% 4.8% 1,291,259 1,515,885 55 500k 400k 41.21% 12% 6.8% 1,039,859 1,114,554

qCWL reduces income risk and increases legacy potential at all issue ages qThe effect is more pronounced at issue ages 45 and 55

Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement

15

Thank You!

Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement

Investment Strategy before Retirement

• - All results shown above are based on optimal investment strategies before

retirement

17

Issue Age Pre-Retirement Investment Strategy 35 Age 35 – 65: Aggressive 45 Age 45 – 55: Aggressive; Age 55 – 65: Moderate 55 Age 55 – 65: Balanced

• Efficient Retirement Portfolios:

Using Life Insurance to Meet Income and Bequest Goals in Retirement