Longevity Insurance – Guaranteeing Income Late in Life
Bob Richards--Marketing and Financial Services
If you think you’ll have enough income for most of your retirement, you can guarantee your unexpected longevity with ‘longevity insurance’. This product is a repackaged deferred annuity which guarantees an income stream starting at a predetermined future time. It warrants your consideration (note that guarantees are based on the claims paying ability of the insurance company).
Longevity insurance, a type of fixed insurance, provides a guaranteed income typically starting after you turn 85. However this guarantee requires you to make an initial investment some 20 years earlier – at 65. You can make a single premium payment at 65, or make a series of level premium payments which should be completed before payouts begin. Money within the contract grows tax free.
Your payouts beginning when you turn 85 are fixed. They can cover you and your spouse for as long as you live -if you choose a joint life option.
IRS gives a 65 year old male a life expectancy of 15 years and for a female, 18.2 years. Based on these life expectancies, a 65 year old has slightly more than a 50% chance of not living long enough to begin collecting on his longevity insurance. With such a circumstance, longevity product variations exist. As an example, your longevity insurance may hold a certain amount that can be paid out to your beneficiary if you die before the payout age.
As a hypothetical example, a stripped down longevity insurance payout at 85 – for a $10,000 purchase 20 years previous – gives about $710/mo for the remainder of your life. But there are no death benefit or withdrawal options – like an annuity. No opportunities to take advantage of stock market increases, either. If cost of living adjustments are not included, you may find that your projected payout 20 years away is woefully lacking.
What might be an alternative investment?
If you invested the $10,000 in the stock market for 20 years, at a hypothetical 6% growth rate, you?d accumulate $32,000. If it grew no more, you could take $710/mo out for 4 years. What’s interesting, though, is that if you do make it to 85, your life expectancy then is 5.7 for a male, and 7.5 for a female.
Longevity insurance should be considered a minor backup at most. You shouldn?t put too much into it?perhaps 10 % of your savings just to guarantee that something will be there if you are too.