Is Longevity Insurance for You?


You shopped carefully for life, car and homeowner’s insurance, and now it’s time to think about another type: longevity insurance.

This little-known type of insurance, or deferred annuity, protects against one of the growing dangers of retirement — outliving your money.

There are various types of policies, but a typical longevity policy is purchased after one turns 60 and begins paying a monthly income after the policy holder turns 85. An example from Metropolitan Life Insurance Company (Stock Quote: MET) shows that a 65-year-old could buy a policy for $50,000 which would provide $40,000 in annual income after the policy holder turned 85.

If that seems generous, it’s because the insurer knows many policy holders will die before they receive anything, and many others will not receive the payments for very long. And, of course, the insurer has 20 years of investment earnings to build up a fund before it begins payments.

The downside for the customer: once the premium is paid, the money is gone. You won’t be able to leave it to your heirs. Nor will you be able to draw on it if you change your mind. That might happen if your health deteriorated and you didn’t expect to make it to 85, or if your investments did well and the longevity policy seemed unnecessary.

Still, a longevity policy can provide a valuable safety net, as the payments continue for life. It would take a solid double-digit investment return for a 65-year-old to turn $50,000 into a $40,000-per-year income stream beginning at 85.

In addition to the basic policy, insurers offer variations to allow customers to hedge their bets. You can get a policy that starts payments as early as age 70 and includes a cost of living adjustment so the monthly payouts grow with inflation, for example. Some policies guarantee some income for a spouse, or a certain payout to heirs if the policy holder dies before the monthly payments begin. Additional provisions can easily double the policy’s cost.

Is a longevity policy worth the expense? The key factor, obviously, is your life expectancy. If you’re in good health and come from a long-lived family, a longevity policy could make a lot of sense. People are living longer and longer. The Internet has numerous life-expectancy calculators and tables for assessing your chances of making it into your eight and ninth decade.

But statistical life expectancy is only one factor. Even if the odds of living to be very old seem slim, it can pay to prepare for the possibility because the consequences of outliving your money are so negative.

For most people, the best option is to set retirement spending so that some resources will last past 85 or 90, and to make a limited investment in longevity insurance to help offset the damage inflation is likely to do to those assets. That way, most of your retirement money is available to be spent during the years you are most likely to live, but you can spend a relatively modest sum, perhaps 10% of your holdings, to get an income boost if you live longer than expected.

Use the Retirement Income and Retirement Planner calculators to develop a retirement investing and spending plan.

To find a longevity policy, talk to your insurance broker and search online for “longevity insurance,” “longevity annuity” and “deferred annuity.”

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