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Ask HN: Why not have reverse life insurance that rewards longevity?

69 points by amichail ↗ HN
In particular, reverse life insurance would only pay out to your loved ones if you live beyond a certain age.

This would encourage your loved ones to keep you alive until you reach that age.

117 comments

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PaulHoule
It's a general problem in retirement that if you live a long time you could outlive your savings. Some answers are

https://en.wikipedia.org/wiki/Life_annuity

and

https://en.wikipedia.org/wiki/Tontine

rundmc
The OECD Pensions team has recently confirmed that in this current environment, tontines offer better value for consumers than annuities.
dmurray
Sounds like an arbitrage opportunity - shouldn't they pay out roughly the same?
rundmc
Insurers make a double profit by charging management fees and by mispricing the longevity risk which essentially means that those dying earlier generate excess profits for the insurer.

In a tontine, those dying earlier generate excess income for the retirees. It's explained here: https://tontine.com/explainer

tfehring
I used to price annuities (but no longer have any affiliation or financial interest in the industry) and this isn’t true IME - annuities are typically priced using best-estimate mortality rates. Outside of immediate annuities, which are a pretty small chunk of the business, mortality rates just wouldn’t be a useful lever to increase profits, since the predominant decrement is generally lapse/surrender, not death. Annuities are profitable because insurers price to high target IRRs or equivalent metrics, build in enough fees or spread to achieve that IRR, and build in enough management levers (e.g. the ability to increase those fees/spread) that they can compensate for any mispricing after the fact.
tfehring
Yes, there’s no reason for the expected total value of your payments to inherently be higher or lower for a tontine vs an annuity, after adjusting for time value of money.

Typically a tontine would have lower payments in early years with much faster acceleration later on compared to an annuity. That means that healthier people would generally do better with a tontine than an annuity, and less healthy people would do better with an annuity. It also means that the nominal amount of payments from a tontine is higher than those from an equivalently priced annuity, but that difference is entirely due to the tontine having more time to earn interest on your money before it pays out.

rundmc
Tontines have no liabilities so do not need guarantees. Therefore incomes do not suffer from the underwriting fees of insurers.

This means that tontine payments typically start meaningfully higher than annuities at the outset even before the faster acceleration kicks in.

tfehring
I guess I don't understand what you mean when you say "tontines have no liabilities." Mechanically, the way that a tontine works (or at least the way that they worked historically) is that I give you a fixed amount of money today, and in exchange you promise me a series of payments that are contingent on my life and the lives of the others in the risk pool. That promised series of payments is a liability, as a matter of accounting but also for all other practical purposes. Maybe you have a different structure in mind, but I don't see a way to operate a tontine-like product without a balance sheet.
rundmc
The liabilities of the insurer are typically fixed amounts regardless of investment performance or changes in mortality. If and when the insurer miscalculates they will be wiped out if their assets don't match their liabilities.

Modern tontines are structured more like the Dutch/Swedish/Danish state pensions (the safest in the world) which have the ability to adjust the ongoing payments to members based upon the investment returns and mortality experience.

Asides from saving on the cost of guarantees, the fact that the trustees of the tontine don't have to cover their liabilities by only investing in low-yield bonds means that the trustees are free to invest in a much broader set of asset classes which in the OECD's opinion will generate higher returns resulting in the tontines being able to provide meaningfully higher levels of retirement income to the members.

tfehring
> The liabilities of the insurer are typically fixed amounts regardless of investment performance or changes in mortality. If and when the insurer miscalculates they will be wiped out if their assets don't match their liabilities.

Again, for deferred annuities (and immediate-election GLWB annuities), which make up the vast majority of annuities that are sold and in force today, that's generally not true. The guaranteed credited rates on fixed and indexed annuities sold today are typically very close to zero (often 0.1% to 0.25%), and the guaranteed option budgets on modern variable annuities are often negative, which gives insurers a ton of leeway to reprice inforce policies as needed.

> Modern tontines are structured more like the Dutch/Swedish/Danish state pensions (the safest in the world) which have the ability to adjust the ongoing payments to members based upon the investment returns and mortality experience.

So pay-as-you-go? Does volume risk get passed along to the members, i.e., your payment in a given period is proportional to the amount of new money that gets put in during that period?

I'm with you on the asset issue, it would be great to have a less capital-heavy way to hedge longevity risk so that people aren't stuck funding their retirements with low-yield interest-bearing assets. But I don't think pay-as-you-go is a great workaround. Volume risk is significant even if you're a state-level actor and can make participation compulsory; I imagine it would be much worse as an individual player in the private sector.

s28l
The risk profile is different. Yes, both have a payout that depends on your own mortality, but there are other risk factors to consider.

An annuity is also a credit risk: if the counter-party goes under, then your payments will stop. Since most of the time the counter-party is a well-capitalized insurance company (potentially with an implicit government backstop), this risk is pretty small.

On the other hand, a tontine has a risk profile that depends on the mortality of the other nominees who participate: your payout in a given year depends on the number of nominees still alive. Also, depending on how it's structured, there might be some market risk as well.

From another perspective, for there to be an arbitrage opportunity, you'd need a way to create a synthetic annuity using a tontine (or vice-versa). But the risk profile of the tontine, which depends on the mortality of the other nominees, is hard to come by unless you are an insurance company. You can view a participant in a tontine as owning a certain life annuity as well as having sold the other participants a smaller life annuity. So each time one of them dies, you no longer have to pay that life annuity and can keep more of the income from the annuity you own.

cryptonector
I don't understand why tontines are illegal in the U.S.
spacemanmatt
Probably judges got tired convicting geezers who committed murder to win the tontine.
clifdweller
it was mostly because of fraud. if you are a banker seems quite a nice premise to sell your rich friends a tontine with them and a bunch of Bering sea crab fishermen in it.
Bostonian
There exist fixed annuities that pay you $X annually as long as you live, which can be thought of as reverse life insurance.

If you are rich and spend say $200K annually on yourself in retirement and buy an annuity that pays $300K annually, and you tell your heirs that the $100K excess will be given to them annually, that would create an incentive for them to keep you alive. If you are that rich, however, they might want you to die sooner to get access to your other assets.

rundmc
If you want your kids even more incentivised to take care of you and help you live healthier & longer, you need to turn yourself from a potential financial liability (the kids will have to support you if you run out of money) into an income generating asset by joining a Tontine (see https://tontine.com/explainer)
SilasX
Since it's reverse life insurance, I had this shower thought that the incentives should be the opposite. Like, for life insurance, you get discounts for factors that make you a low risk of dying. So for annuities, shouldn't you get bonuses for factors that make you a higher risk for dying?

"Yeah, I just want this annuity to ensure my financial future while I ride out my retirement as a skydiver..."

Bostonian
An "impaired risk annuity" AKA "medically underwritten immediate annuity" offers higher payments for annuitants in provably poor health.
bckr
I like that you're thinking differently but I don't see what the economic model is here. Then again, I don't understand normal life insurance either!
rundmc
Because life insurance companies make profits by:

a) overcharging you for covering the risk of you dying too early (death insurance is marketed as 'life' insurance)

b) overcharging you for covering the risk of you living so long that you run out of money (fixed annuities).

Disclosure: I am the founder of https://tontine.com which will shortly launch a lifetime income solution that will reward you for living longer and we are hiring.

jfengel
I will say I'm impressed that you secured the domain name. That word was precisely what came to mind upon reading this question. A tontine is precisely insurance against living too long.
rundmc
I still can't believe the price they quoted us for it. Sometimes it makes no sense to haggle.
WFHRenaissance
How long before you start killing customers because they're living too long?
irq-1
As opposed to killing customers because their treatments cost too much? (Which happens everyday by denying coverage, unlike the fictional plot device of Tontine as a motive for murder.)
WFHRenaissance
As if multinational pharmaceutical companies don't kill their problematic customers eye roll
rundmc
Unlike insurance companies, we don't benefit from customers passing away.

If customers are living longer, our algo's slows down the capital payouts which means that we earn fees on more assets for longer.

Therefore it makes commercial sense for us to give customers tips to help them live longer.

For example, I just found this today: https://academic.oup.com/ageing/article/51/5/afac080/6572254...

polishdude20
What sort of guarantee is there that this company will be around to pay this insurance our by the time I'm most likely to die? I'm 29, say I've got another 50 years left. Is there some insurance or assurance you can give in the event of the death of the company? A sort of meta-tontine?
rundmc
Firstly, ~125 years ago, there was a crash in the insurance industry. The insurers which offered tontines survived, all of the others disappeared.

Secondly, the trust is managed by a board of trustees that have a fiduciary duty to look after the best interests of members rather than the best interest of shareholders.

When the next crash of 2008 scale or worse occurs, would you prefer to be a general creditor of an insurer (which has a debt to equity ratio of ~12:1) or would you prefer to be a beneficiary of trust with no debt which manages assets like the Harvard or Yale endowments whilst being legally obliged to look after your best interest?

polishdude20
Hmm that sounds not bad actually!

How does it work say if I die before starting to take a monthly sum? Say I want to retire at 65 but I die at 40. I wouldn't get anything in that case.

So the first hurdle to overcome is to actually reach retirement age? I guess pensions work the same way, we pay into a pension and if I die before retirement, goodbye pension.

How are monthly amounts calculated? Is it, the more I put in the more I can get out monthly when I retire? Do I get paid more monthly as I get older because we're assuming more people in my "pool" have passed away?

If I stop contributing after some time before I retire, do I still get a pension?

dragonwriter
> death insurance is marketed as 'life' insurance

Looking at other insurance, naming after the thing insured (auto insurance, life insurance, motorcycle insurance) is pretty common, as is naming after the class of people who might want it (homeowner’s insurance, renter’s insurance) and the source/cause/type of loss insured against (flood insurance, malpractice insurance).

I don't think any of those is more fundamentally “correct”, and they are all marketing tools.

obiefernandez
Regarding hiring: Is your software written in Ruby on Rails?
rundmc
Haskell
JoelMcCracken
What is your overall stack like? Haskell dev here, always curious about commercial use.
treis
Because I want my family to be supported in the event that I die early. I don't really see much value in leaving them a prize for dying old.
toomuchtodo
Indeed. You're buying a put option on yourself to insure against a black swan event.
jfengel
They don't need a prize for you dying old. But you yourself would benefit from insurance against outliving your savings.
rundmc
But if you live so long that you run out of money then you become a financial liability to your family. That's why longevity insurance makes sense.
aynyc
This would encourage your loved ones to keep you alive until you reach that age.

Besides insurance companies for profit motive aside, this might create a lot of unnecessary medical procedures to simply prolong someone's life, even if the quality is total shit.

rhn_mk1
There's a dual to that in life insurance, where it incentivizes procedures (or inaction) to shorten life.
nebula8804
The Social Security scam in the US. Encourage people to eat poorly by making healthy food less subsidized compared corn filled garbage and watch as your workers spend a whole careers working while eating poorly to generate value only to die off at retirement as they start to collect on their hard earned effort.
DennisP
Could fix that by making assisted suicide an option for the patient. Patient has to live, and want to live.
aynyc
You have to assume the patient has mental capacity to make that decision. I saw first hand family member without DNR went through. I don't want that for anyone.
MrTortoise
surley brain in a jar is the more logical outcome?
988747
No need for medical procedures. There was this scheme in Greece, where people would simply not report deaths of their parents, bury them secretly in the backyard, and continued to receive their pension payments.
NickRandom
I'm not sure about what the concept is but tell me if this is more or less it -

So you pay me (the insurer) a monthly premium and if you live to be 150 years old I pay you a million dollars and if you die earlier than that all I get is the money from the premiums? Ok, I'll take that deal and wouldn't have any problems getting reinsurance on it. Fantastic, write me a check.

150 y.o is a bit too high? Ok, no problem we'll make it 109 years. I'll still take the deal (and your money).

Lower that to you making it 40, 50 or 60 y.o to get the payout? No thanks. Well, not without a full medical and access to some actuarial tables :)

the_only_law
> Lower that to you making it 40, 50 or 60 y.o to get the payout? N

How about 90? It's pretty old, and many people won't reach it, but it's not exactly super rare either.

Then again, one topic that's popular on HN is age extending technology, if that ever became a realistic option you're screwed.

NickRandom
The percentage of people living past the age of 90 is much greater than it was in the neolithic era so the premiums would be priced appropriately. To 'win' all the insurer needs to do is ensure that payouts never exceed 49% of premiums received. Calculating the premiums payable on a million dollar policy with a cut-off of living beyond the age of 90 is a dark art relegated to the world of Excel tables, COBOL, Fortran and AS400 but gut instinct tells me that the premiums would be at a level that most people with access to a calculator would go ‘ah hell no, I’ll stick my premiums in to a fixed deposit interest bearing account instead’.

If you have ever seen life assurance policies that state somewhere in the fine print words to the effect of 'this is a whole of life policy and the premiums paid over the lifetime of this policy may exceed any expected payout' then congrats – You’ve just spotted the ‘gotcha’ of insurance.

JJMcJ
Assuming public health doesn't collapse in the near future, and that's a real possibility, it seems like 85 is the new 70. That is, someone makes it to 85, you can say they had a long life, instead of the old three score and ten.
jimkleiber
> This would encourage your loved ones to keep you alive until you reach that age.

And encourage the insurance company to want you dead.

I like the thought exploration and fear the incentives.

diordiderot
Insurance company isn't the beneficiary of excess.
polishdude20
It's the other people in the tontine. So don't let that list leak I guess?
hgsgm
Create a will that gives all your money to a bunch of charities, but not enough that they would kill for it.

Then give your loved ones gifts while you are alive.

xg15
> This would encourage your loved ones to keep you alive until you reach that age.

Why would they need external encouragement for that?

groffee
Unfortunately there's been a few cases where families have basically killed off older relatives to get their inheritance early.

So conceptually reverse life insurance is a great idea, but I can't see how it'd work in practice.

lolsal
Consider a scenario where you don't want to be alive, like dementia, or cancer, etc.
xg15
Uh, okay. Then I guess the scheme should motivate my family to keep me alive against my explicit will, even if it makes no medical sense and would only prolong my suffering. And that's supposed to be a good thing?
barbarbar
In most cases the life insurance is for the loved ones to continue their life in a reasonable way in case you die from illness or accident. So despite they want to keep you alive that is not allways what happens. So the reverse may be "nice" but in case you die early it is a double penalty for the loved ones.
scrappyjoe
You should research to tontines, as they are somewhat related. You pay a lump sum along with a number (10-1000) of people of a similar age to buy an asset - say, a property - and then you each receive an equal share of the income each year. As people die off, the income is shared across successively less people until at the end it’s only one person who receives the income of the entire asset. At the death of the final recipient the asset generally cedes to the administrating company as payment for their administration over the life of the tontine.
woojoo666
> As people die off, the income is shared across successively less people until at the end it’s only one person who receives the income of the entire asset

Oh so kinda like hunger games

staticman2
For one thing your loved ones don't have much influence on how long you live?

For another you could just cut them out of the will if you die young?

I don't know what problem such an insurance could solve.

The best way to insure your kids and loved ones try to keep you alive is to behave in a way that will (hopefully) cause your kids and loved ones to like you.

gifjif
Insurance in ANY form is gambling. Plain and simple. It is a bet that takes places. Just framed in a more flowery language compared to a traditional betting statement "If I win you pay me x, if you win I pay X".

Insurance company: " Pay me $xxx per month, if something happens to you, we will pay you X"

You may benefit i.e your insurance claim is more than the premiums you have paid, or you can loose out by paying more insurance over a time period than the claim. Or simply loose all together where you keep paying and you never get the opportunity to claim.

The insurance company operates like a casino, probability is calculated so it always earns more than it looses.

jfengel
Insurance is hedging risk. The goal is not to make a profit; the goal is to cut your losses.

You don't "win" by dying young and getting an insurance payout. You just lose less than you would without the insurance.

If it's a bet, it's a bet you hope to lose. But in a large pool of people, the odds are that one of you will "win". Your descendants recoup the winnings, and the rest of you breathe a sigh of relief that it wasn't you.

It's not unreasonable for a company to facilitate that, with a small but reasonable profit. Obviously there is a lot of opportunity for malfeasance and malpractice, simply because there's so much money involved, but the concept itself isn't inherently bad.

Neither is a casino, necessarily, but a casino is offering only entertainment. There is no risk to you if you don't play. But in the case of life insurance (and other forms of insurance), you take that risk every day. If you're sufficiently well-off to self-insure, you shouldn't participate, because its offers no benefit. But it offers a genuine tangible benefit to those who cannot afford the risk and seek a hedge against it.

francisofascii
Actually, insurance if done properly is the opposite of gambling for the person buying the insurance. You are paying a small fee to not have to gamble.
avgcorrection
Insurance is like reverse gambling. The only similarity is that the house always wins in the long run.

Unless your definition of gambling is so loose that not buying a lottery ticket is gambling.

giaour
> Insurance in ANY form is gambling.

Only in the sense that both insurance and gambling charge a fee to alter the variance of a given outcome. But insurance exists to minimize or eliminate variance, whereas gambling seeks to increase it. In this sense, they are opposites.

Rerarom
Isn't this just private pension?
nonameiguess
It's worth considering the existing form of "reverse life insurance" that already exists, which is simply selling life insurance policies. The counterparty in a two-party bet is always the reverse bet.

Think of whether it's worth it from the perspective of the seller to insure only one person? Short answer is no, because that's extremely risky. When you sell insurance policies to thousands or millions of people instead, you can use actuarial statistics and finance the policies with bonds in such a way as to ensure you will make money, with the scale limited only to how many policies you can sell, independent of whether any specific person lives or dies.

So why is life insurance worth it from the purchaser side? Many people will argue it isn't. You're virtually guaranteed to lose money. But the argument in favor is that an early death can be disastrous to others who depend on you and can't support themselves otherwise. It can be worth losing money to gain peace of mind. But really, that is the main argument. It's not a good investment. It's protection from disaster.

The only real analog on the other side is the possibility that a person lives much longer than expected without being able to support themselves, leaving loves ones on the hook. But the best form of "insurance" against that happening is pensions, social safety nets, and the individuals themselves simply saving and investing well as long as they're still working. Whatever money you might have allocated toward reverse life insurance, just allocate toward appreciating assets that will generate income when the person you're reverse insuring stays alive.

gergesh
I think this is what investing is. Being genuine and not snarky here, but you can put money into a pool and save it and make more back over time, whether or not it's nominally "insurance".
bilsbie
I just saw a similar idea for a gym membership. Expensive upfront cost but you get $5 dollars back every time you work out.
abeppu
I think a key issue is that people that want to go the gym don't want it to be crowded. Under the current model, supposedly gyms rely on people paying memberships but not going. But also, the people that are actually there also want it to be well under capacity so they don't have to wait for equipment, etc. So even if you're really confident that you would go to the gym often enough to recoup your costs, would you want to go to a gym where everyone else has an extra motivation to go?
iso1631
And if you want to go to the gym more often, but things get in the way, this gives you a more concrete incentive to go
tptacek
Isn't this basically how social security, or, for that matter, a defined benefit pension works?
hirundo
It exists, and is known as "compound interest".
sethhochberg
And already something exposed to the insurance world via Whole Life policies - which are technically life insurance, but with an investment vehicle baked in. Whole life policies are typically a lot more expensive than term life, but a portion of premiums paid goes into cash value which can be invested in markets, and often tax-free.

If you die early, your beneficiaries get a bigger payout than you paid in. If you live until the end of the whole life term, you've accumulated cash value and investment income on top of it.

The "catch" is really just the expense of the premiums. Whole life is out of reach of many people shopping for life insurance, especially those looking for coverage because their financial lives are already pretty close to the edge with debts, etc.

staticman2
The "Catch" with whole life is the expected returns are lower than term life coupled with clean, insurance free investment.

You also have a entire industry of sales people spreading misinformation about how the policies work:

https://www.whitecoatinvestor.com/debunking-the-myths-of-who...

Bostonian
Arguably whole life (WL) policies should be compared with buying a term policy and investing the difference in bonds, since WL policies are relatively safe. Then WL policies are competitive because of the tax benefits. WL policies will lag (term + stocks), but the latter strategy is more risky.
akramquraishi
Insurance companies will be hiring contract killers to save their premiums.
Ishmaeli
That's what annuities are designed to do.

In life insurance, you pay the company a small periodic payment in exchange for a large lump sum payment if you die while the coverage is in force. If you die after paying just one premium, you win! If you live so long that you paid more in premium than the lump sum, you lose!

With an annuity, you pay the company a large lump sum in exchange for a small periodic payment for the rest of your life. If you die after receiving just one payment, you lose! If you live so long that the company pays you more than your initial lump sum payment, you win!

blairanderson
yes and simple calculators are everywhere: https://www.schwab.com/annuities/fixed-income-annuity-calcul...

Its basically 5% Annually... to which stock-people say "why not put into a dividend earning fund" and analysis paralysis kicks in...

burntoutfire
I went into that calculator and it does not say anything about inflation... Do annuities get wiped out by inflation (i.e. they'll keep paying me the agreed monthly amount, but unfortunately it's not going to be worth much)? If, then they're pretty crappy.
noodlesUK
There are instruments at least that used to exist (in the UK) called defined benefit pensions that effectively work as you describe. They have some level of inflation cap (typically between 3 and 9%) beyond which they are not inflation protected. I don’t know if people can still get them, but many pensioners in the UK on private pensions have them.
rundmc
Fully agree. That's why tontine are so attractive, the income is expected to rise which may keep up and possibly surpass inflation.
tfehring
Yes, they generally get wiped out by inflation. You can get annuities whose payments increase by a fixed amount every year, or that increase based on the performance of the S&P 500 or whatever, but AFAIK you can't get an annuity with inflation-indexed payments today. I agree that that limitation makes them pretty crappy. Inflation-indexed annuities used to be available (I think until 2010 or so), but companies broadly stopped selling them because hedging long-term inflation is expensive.
BayesianDice
In the UK at least it looks like you can still get inflation index-linked annuities - for example, there are entries in the Hargreaves Lansdown "best buy" tables for for RPI-linked annuities: https://www.hl.co.uk/retirement/annuities/best-buy-rates

But their starting income is less than half the income from the non-increasing annuity, presumably because of difficulty/expense in hedging inflation risk.

sp527
That strategy is even better when you factor in stepped up cost bases on inherited property.
rundmc
But the annuity only 'rewards' your longevity if you live 15-20 years or more because that is the bare minimum it takes to get back your capital.
imachine1980_
Yes, that's the point. if not is a ponsi scheme, or simple investment in bonds, the point is you make sure than you don't get whiout buck if you live till 100, not make maximun money, this service use actuarial probability to assurethat.
muzani
I used to say insurance was a form of gambling, but it's really just planning around worst case scenarios (dying before I can save for kids' education).

Annuities sound like the actual gambling, lol.

pontifier
If they pay you until you die, you're not likely to care that they stopped paying you.
auxym
Annuities are like insurance against the worst case scenario of outliving your savings (longevity risk).
d--b
This is what we call life insurance in France. It's quite common.

An insurance that pays your loved ones if you die is called a "death insurance".

An insurance that pays you if you live past a certain age is called "life insurance". It's basically a pension fund (except that your loved ones do not get any money you set aside if you die - so usually people take both life and death insurance)

Ayesh
we have "life insurance" (that pays on death), and "pension plans" that trickles money to your account until you eventually die. But the terms "death insurance" and "life insurance" (in French) make so much sense! Those are how I will call them from now on, no matter how telemarketers who call me name them.
Someone
“Live insurance” also makes sense. It means you get money when you lose your life, just as “car insurance” means you get money when you lose your car.