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Funding risk

November 29 2008 at 6:51 PM
Charles Platt  (Login cplatt)
Veteran Member

 

Suppose someone aged 25 signs up using a whole life policy with $100,000 face value. Now suppose he lives fifty more years, which is his current life expectancy, more or less. And suppose $1 today will have only 97% of its value one year from now, and one year after that it will be worth 97% of 97%, and so on.

When this person dies his $100,000 insurance payout will be worth less than $22,000 in constant 2008 dollars.

What if inflation is just a little higher over that period? It certainly could be. Suppose $1 today is worth only 95% of its value one year from now--and so on, year after year. In this scenario the $100,000 will be worth less than $7,700 fifty years from now, in constant 2008 dollars!

But now let's be really pessimistic, which I suggest is the only ethical way for a cryonics organization to be. Suppose the US dollar diminishes to 90% of its previous value each year. Under these circumstances (which may be unlikely but are conceivable, since a sum of several trillion dollars appears to have been committed to the US money supply and has not even begun to work its way through as inflation) the eventual payout will be worth just $515 in constant 2008 dollars.

Here's a table that shows the outcomes for various inflation rates, assuming the same $100,000 face value for insurance purchased in 2008. Because of limitations in this text editor, I have used a monospaced font with character spaces to format the columns:

Annual reduction      Face value in 2058 in value              in 2008 +dollars 99%                   $60,501 98%                   $36,417 97%                   $21,807 96%                   $12,989 95%                   $ 7,69594%                   $ 4,533 93%                   $ 2,656 92%                   $ 1,547 91%                   $   896 90%                   $   515

Clearly the cryonics organization is taking a huge gamble on US monetary policy. But, our young person may feel a bit self-righteous about it. He is likely to complain, "I will have been a member for 50 years, paying life insurance premiums all that time. Therefore I deserve to be cryopreserved." Well, sure, he has paid a lot of money--to the insurance company. Thus the insurance company profits, while the cryonics organization loses.

(The cryonics organization will have received annual membership dues during that whole period, but that's a separate issue.)

Conclusion: The financial model used by cryonics organizations entails significant risk. Personally I see it as suffering from the same kind of optimistic assumption that is endemic in cryonics: That someone in the future will fix any mess that we create today.

Now for the confessional part. I have, to some extent, contributed to the mess, despite trying conscientiously to avoid doing so.

When I devised the terms for standby service through Suspended Animation, I wanted a minimum cash prepayment to guarantee three days of standby, plus a subsequent pay-as-you-go amount for each additional day. Result: Only one person signed under these terms, and the last time I inquired (about a year ago), only two people had ever accepted those terms. (The second of those people was me.)

Before I left SA, under some pressure from CI and from others at SA, I added a prepaid flat-rate plan, which would cover up to two "unlimited" deployments. That attracted no takers at all, so far as I know.

Under more pressure I added an option allowing people to set aside a portion of life insurance to cover up to two "unlimited" standby deployments. Yay! Dozens of people took that deal. So, I ended up using the same bad funding model as everyone else, because consumers would not accept anything else. However I included the following wording, which basically says that SA isn't going to grandfather people in, if rates go up:

"This figure cannot be guaranteed for the indefinite future. Clients are advised to obtain additional insurance, if possible, to protect themselves against the possibility of future increases due to inflation or the availability of new, more sophisticated procedures which may be offered as an extra-cost option."

(See http://www.cryonics.org/SA/SA_details.html for more details.)

I doubt that more than a handful of people added insurance in response to this warning. My conclusion is that cryonicists don't much like the idea of paying for cryonics, and because cryonics organizations are always desperate for members, they have surrendered to the demands of the members.

Now, let me try to end on a more positive note. What could be done to clean up the mess? Two options come to mind:

a) If cryopreservation minimums increase from time to time, everyone should be affected. Someone who joined a couple of decades ago should have to pay the same, if he dies tomorrow, as someone who joined only one year ago. No one would be grandfathered in.

Or:

b) The younger you are, the more insurance you need. Someone who is 25 would have to have, say, $1 million in whole life insurance, to protect against inflation. The good news is that since someone aged 25 has such a small risk of death, a $1 million policy should still be affordable. Certainly it will not cost 10 times as much as a $100,000 policy.

As I understand it, some people have complained that option (b) would be incompatible with an organization's tax-exempt status, which requires cryopreservation minimums to be classified as donations rather than fees for service. Okay, if that's the case, then option (a) should be adopted, unless someone else can think of a third option.

The way things are right now, cryonics organizations are mortgaging their future, presumably on the assumption that rich benefactors will bail them out, just as rich benefactors always have. Since this entails the implicit threat that the organization may fail if the benefactor doesn't provide help, it sounds a bit like a protection racket. "Nice little cryonics organization you have here. Be a shame if something happened to it." And of course it is also a "soak the rich" policy.

Who would have thought that so many fiercely libertarian cryonicists would be so complacent about such a setup?

--Charles Platt


 
    
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