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 because of its unique characteristics and can act as a substitute for a life annuity.
Longevity insurance, a type of fixed insurance, provides a guaranteed income typically starting after you turn 85. Given that it pays an income for life, it is similar to a deferred annuity that you annuitize at a set time for income as you do with a life annuity. However this guarantee requires you to make an initial investment some 20 years earlier – at age 65 (while life annuities begin payments as soon as you make the deposit). 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 annuity option.
Life expectancy for a 65 year old male is 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. Similar to a life annuity, if you die early, you don't collect. With such a circumstance, longevity product variations exist. As an example, some insurance companies may issue longevity insurance that specifies an 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 is no death benefit or withdrawal options – as you would have with a deferred annuity. There are 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. On the other hand, both life annuities and longevity insurance, because they provide a lifetime income are like a second social security check.
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 and the account would be depleted. What's interesting, though, is that if you do make it to 85, your life expectancy then is and additional 5.7 for a male, and 7.5 for a female.
Longevity insurance should be considered as part of your backup plan. Not for a lot of your funds, but potentially for some. Longevity insurance or a life annuity is a great way to invest. You shouldn't put too much into it…perhaps 10 % of your savings just to guarantee that something will be there if you beat the life expectancy tables.