Of Memoirs and Annuities

YESTERDAY’S ‘COLUMN’

John Leonarz: ‘This doesn’t count toward 2600, right?’

☞ Well, it was very short. I’ll grant you that.

CLARE & LULU, VOLUME TWO

Print Your Own Memoir or a Photo Album for Mother’s Day

Clare continues from Monday: ‘I have a lot of experience in desktop publishing but had never done a book on my own. I did, however, know how to create a .pdf file in PageMaker, and that’s what they want. My friend Helga is a long-time summer resident of Monhegan (a Maine island), as am I, and I knew that there would be enough interest in her memoir to justify printing maybe 300 copies. Several of us around the country were working on the book and each needed to see a draft, so I uploaded it to lulu and got us proofs – and an amazingly well-produced 240-page paperback book for $7 each. After revisions, I ended up shipping the final copy to fidlar-doubleday which gave me a price of 5.50 each for the final run. Lulu will give you all the help you need to get an ISBN number, register your copyright, market the book on Amazon, allow anyone to print a copy on-demand, etc. (On another note, the ability to make photo-books on sites like shutterfly.com and others has made the home-made travel or event scrapbook obsolete. Again, amazingly professional outcome with very little effort.)’

☞ Not to be profligate here, but it’s lulu’s $20-or-so hardcover-with-dust-jacket price – even for printing a single copy – that blows my mind. And if you’re going to all the effort to write or compile a book, what’s another $13?

ARE THE ANNUITY ODDS IN YOUR FAVOR?

When it sells you a life insurance policy, the insurer hopes you’ll live forever. When it sells you an annuity, it hopes (politely, I’m sure) you die on the way home. Tobias Brown (no relation) thinks that for today’s seniors, the insurers may not be calculating the annuity odds as sharply as they might – which could be an opportunity for those in good health. (Before reading his thesis, you may want to go back to the beginning of this thread, about the widow with $250,000.)

Tobias Brown: ‘I have always agreed with you that annuities are, in general, a duff investment. I think, however, in some cases single premium annuities with inflation adjusting characteristics make sense. Particularly the ones from Vanguard which I believe somewhat under-price the inflation adjusting component. (I did note one concerned reader wrote in about the credit worthiness of AIG, the Vanguard annuity underwriter. I laud the gentleman for being concerned, and for looking at various ratings, but I believe that AIG is among the more financially sound insurers around.) An important point on these annuities is they allow someone to legally self-select and, in effect, deliver a poor risk to the insurer.

‘With a life insurance policy, the insurer wants you to live a very, very long time. Hence to ensure that you don’t self-select and buy life insurance when you know your health is bad, the insurance companies require you to take a health exam. However, in the case of an annuity, where they are happier if you die earlier, they don’t test to see if you have lived a super healthy life, never smoked, jog, have parents who lived until they are 107, and go to the Mayo Clinic for an annual physical. Yet they price the annuities to everyone as though you are just part of the ‘average’ mortality pool (perversely, unlike charging you less for a life policy if you don’t smoke, they should give you a higher monthly payout for an annuity if you do). Hence, if you believe you have a good chance of living far longer than the average, particularly with the inflation adjusting option (which dramatically increase the risk to the insurer and the value to you, for each ‘extra’ year lived), you are buying something that is, in effect, very cheap.

‘With recent advances in healthcare, and much, much better information on how to live healthier lives, people have much more control over their longevity than at any other time in history. Pooled mortality in the United States hasn’t moved up much in the last 20 years, but in better educated and higher income groups, it has risen dramatically (a sad fact, but a true one). Yet the actuarial assumptions used to price these annuities don’t select sub-categories of risk. So for those that lead ‘virtuous’ lives, and have good genes, these annuities may be a steal. My prediction is they won’t be sold for much longer, and if they are, the payouts will be lower, or there will be outside caps (i.e., for a certain number of years, not life).’

☞ But hang on (I wrote back). It was my impression that the insurers assumed that the pool of people buying annuities was healthier than normal, and built in for themselves plenty of margin for error (and overhead and profit). This is still my impression, but Brown makes a strong and interesting case that these annuities could be a better deal than I’ve thought.

(Please note, before I hand the mike back to him, that we are talking here about true annuities, bought by elderly people to assure an income for life – not the heavily promoted but rarely worth buying ‘investment annuities’ sold to 35-year-olds as tax shelters.)

Tobias Brown responds: ‘There is some (but not much) biasing in the actuarial pools towards longer life assumptions. But what has changed, and they haven’t caught up with, is the very, very substantial degree to which good life style choices, and good access to health care (the most important factor) can vastly warp your actuarial life span assumptions. The insurance companies will catch up with this, but they haven’t yet. I would guess the reasons for this are:

1. It takes awhile for this to emerge statistically and the skew has only really been accelerating in the last 15 years.

2. Not that many people (buyers) have cottoned on the concept of ‘reverse’ adverse selection yet, and the numbers are small (in contrast to everyone long ago having cottoned on to adverse selection when it comes to buying life insurance).

3. In the past, annuities had such massive margins, they didn’t care. [But with stripped down, single payment, ‘no load’ product the margins are less.]

‘The really interesting issue will be when sequencing your own DNA becomes affordable (which it almost is now, and certainly will be in three years) and people can look at their SNPs ( single nucleotide polymorphisms, i.e. the way in which your DNA and mine are different) and make insurance decisions based on what they know (that the insurance company won’t). Fairly quickly the insurance companies will have to respond by sequencing applicants’ DNA also to avoid adverse selection. This will open a massive regulatory and policy can of worms.’

Tomorrow: Back to Butter Substitutes – and More