Is there anything better than to live long and prosper? If the first component of this equation is getting easier lately, having enough money to cover your retirement years is a great challenge nowadays. The studies of financial longevity reveal both risks and opportunities that financial institutions face as the worldwide average lifespan is continuously growing.
What Is Financial Longevity
The new concept in finance promotes the preparation of governments, regulators, businesses, banks and fintech players for the opportunities and challenges of the financial well-being of their ageing customers.
Financial longevity or longevity finance is a term that describes the need to include senior-age customers and dedicated product services in the economic system, considering increasing life expectancy.
How Growing Longevity Affects the Financial Sector
People today may not realise that they get to live much longer than their average predecessors. Globally, the average lifespan of a person born in 1971 was 58, while five decades later, it rose by 19% to 71. Due to more robust improvements in medical care and living standards in many countries, locals live to an average age of 80-87.
Even during the twenty-first century, life expectancy has shown significant growth. The World Health Organization (WHO) estimated that the typical global lifespan increased by more than six years between 2000 and 2019 — from 66.8 in 2000 to 73.4 years in 2019.
Maintaining the well-being of increasingly ageing populations creates an additional burden not only on global healthcare systems but also on financial organisations. There is an acute need for financial tools that can support longevity through progressive banking services, improved retirement income schemes, and insurance coverage.
Risks and Opportunities of Longevity in Finance
One of the main longevity risks is that retirement savings run out before one’s death. As life expectancies rise, there is a need to update available retirement plans in many countries. Instead, currently, many governments across the globe have increased the official pension age to minimise the number of people in the system.
The rising cost of living is forcing many to continue to work far past the age at which they would prefer to retire, along with raised age thresholds for when citizens can receive money from social security plans. In this case, increased longevity goes hand in hand with a need for more sufficient savings. Both businesses and financial institutions must take care of appropriate retirement savings offerings.
An organisation needs improved analytic capabilities to design a proper longevity savings plan or a dedicated investment offering for senior citizens. It should better use artificial intelligence (AI) and machine learning to understand the changing longevity dynamics and ongoing challenges.
Pension funds and life insurance companies also consider mortality data to estimate future longevity and manage risk exposure. As longevity challenges retirees, many insurance companies develop their longevity insurance policies, protecting a pension scheme against the risk that members live longer than expected.
What Risks May Arise From Longevity
The financial sector must consider the following longevity risks in their activities:
- pension funds face the challenge of increased pension obligations, potentially leading to underfunding or requiring higher contributions;
- insurance companies that provide long-term care coverage get the pressure of increased cases when a chronic or disabling condition requires prolonged treatment and financing;
- if risk assessments are incorrect, financial institutions, particularly insurance companies and pension funds, might face a severe mismatch between their assets and liabilities as they are obliged to provide income or benefits over a more extended period than initially anticipated;
- for annuity providers, an unpredicted boost in longevity directly impacts their profitability and solvency;
- fund managers face challenges in providing investment products that can create stable returns over extended periods.
Longevity Provides Plenty of Opportunities for Fintech Segment
Being more flexible than traditional financial institutions, fintech companies are the best candidates to reap the benefits of longevity opportunities. What are those opportunities exactly? Let’s see…
- Financial advisors can provide additional wealth management services to help retirees manage their assets, better plan for long-term care, and ensure their financial security throughout retirement.
- The longer people live, the more health issues they need to address. Here, financial institutions step up with their innovative financing solutions for healthcare expenses, including ageing-related insurance products.
- Asset managers can develop investment strategies and products specifically designed for retirees, who often have more solid financial standing than young professionals.
- For seniors, visiting financial institutions in person may be challenging. Thus, with their technology solutions, fintech companies can assist older individuals with remote financial management, including account opening, budgeting, bill payment, fraud protection, and retirement planning and monitoring tools.
- Financial institutions can also develop specific longevity-linked securities to transfer longevity risk to investors willing to bear it while hedging against potential losses.
- With longer lifespans, estate planning and inheritance management services also provide more opportunities for financial advisors and wealth managers.
Fintech Products Addressing Financial Longevity
Companies that understand the need for longevity-related services have already launched dedicated fintech products designed for customers living extra-long lives.
Longevity Insurance
We have already mentioned longevity insurance, which provides a regular income for the remainder of an individual’s life after reaching a certain age. Longevity insurance typically does not target the early retirement years, so it is rarely marketed as a complete retirement plan. Being, in essence, a deferred-income annuity, such insurance provides a firm time limit on how long you’ll need to depend on your other savings before getting regular guaranteed payouts.
At the same time, longevity insurance annuities are often too costly and do not provide coverage to the insured person’s life partner, unlike joint life insurance, which continues to pay out for as long as either spouse lives. Besides, if the initial premium returns, the payout is not quite as high, so your family has to prepare to get nothing at all in case of your death before the set age. Therefore, these deferred-income annuities are not too popular at present.
However, implementing a more tech-driven and thorough risk analysis might help insurtech providers develop favourable terms for longevity policies without hindering the financial well-being of a long-living customer.
Lifetime (Reverse) Mortgages
With a reverse mortgage, individuals who reach a certain age can convert some of their home equity into cash. This way, they can generate tax-free income during retirement without selling their homes or handling mortgage payments. Such a loan is typically repaid when the homeowner passes away or moves into long-term care.
The drawback of a reverse mortgage is that the borrowing costs can be too high. Besides, non-borrowers who live in the same home with the mortgage owner either have to repay the mortgage in full or surrender the house to the lender when the borrower dies or moves to a nursing home.
Some fintech providers see the chance to improve reverse mortgage offerings with customisable terms, flexible interest rates, and seamless end-to-end processing, which enable tailored solutions that match clients’ unique financial situations.
Longevity Bonds
These financial instruments are issued by governments or insurance companies. They pay out when a predefined index of longevity exceeds a certain threshold. Investors receive payments as compensation if life expectancies exceed expectations.
Longevity bonds are mortality-linked securities that allow tailor-made hedging and do not involve credit risk. They are traded on organised exchanges. In addition to bonds, the longevity derivatives market also hosts forward contracts, options, and swaps. Because longevity derivatives don’t move along the equity or debt markets, they are potentially attractive investments and a curious way to diversify portfolios for annuity payers and other interested parties alike.
Longevity-Focused Investments
Investment platforms and asset managers can address longevity in their services in two ways. First, financial advisors may offer investment strategies that combine assets that generate long-term sustainable income and preserve capital over an extended retirement period. In addition, they may create dedicated investment funds targeting biotech and pharmaceutical companies specialising in anti-ageing treatment or start-ups leveraging AI and big data analytics to develop healthcare solutions for the ageing population.
Fintech Apps for Seniors
Many companies are now creating fintech services that specifically target older adults, providing them with intuitive platforms to manage estate planning, life insurance, financial accounts, prepaid debit cards, bill payment, and more. Some senior user-friendly apps may also include additional healthcare-related services, market comparison tools, financial education resources, etc.
It is crucial to adhere to the vital accessibility principles when building a product for this age group. However, many fintech providers ignore the needs of seniors. Thus, readability and abundance of non-essential icons are still among the most significant challenges for fintech platforms or apps.
Besides, when it comes to fintech products for senior users, fintech providers should focus on more than just the smartphone experience and consider the other devices they prefer, like tablets. Such apps should always have clear tutorials and straightforward explanations.
Summary
Financial institutions face both risks and opportunities as the average lifespan continuously grows worldwide. On one hand, financial organisations might face a severe mismatch between their assets and liabilities as they are obliged to provide income or benefits over a more extended period than initially anticipated. On the other hand, senior citizens are one of the wealthiest social categories. They need dedicated financial services and tools to cover their retirement period. Fintech providers who realise that and fill the market gap can reap all the benefits of longevity finance.
