What is a Longevity Annuity?
Longevity insurance is an annuity policy specifically designed to provide lifetime income to individuals who expect to have long lifespans. It’s like the opposite of life insurance: whereas life insurance insures loved ones in the event that you die prematurely, longevity insurance insures that you’ll have money if you live an unusually long time.
Advisor Insight
Scott M. Sadar
Certified Financial Planner™
“Longevity insurance is often thought of as a way to provide income from an age you select in the future, say age 80 or up to age 85 for the rest of your life. Longevity insurance is therefore a type of deferred income annuity (DIA). All DIAs are single premium income annuities where the payments begin at least one year later. The most efficient pricing for longevity insurance will be life only, which means you may or may not receive a benefit. Return of premium death benefit options will protect this asset for your named beneficiaries, although the pricing will be more expensive.
Longevity insurance is a way to provide protection against the cost of living longer than you planned or expected to.”
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Overview
Longevity insurance is an annuity policy specifically designed to provide lifetime income to individuals who expect to have long lifespans. It’s like the opposite of life insurance: whereas life insurance insures loved ones in the event that you die prematurely, longevity insurance insures that you’ll have money if you live an unusually long time.
Who are these fortunate people who think they need longevity insurance? Well there are a lot of them, and more and more every year. In 1900, the average American only lived to their mid-40s and worked almost their entire lifetime. As of this writing, the average lifespan is 79.8 years for an American (77 years for a man, 82 for a woman). Longevity insurance is typically considered by people who have a family history of long lifespans, or who are in particularly good health and think they’ll live a long time. They are also often purchased by folks who have no idea how long they will live, but want piece of mind that if they do live for a really long time, they’ll have guaranteed income. (If they’re wrong and don’t live so long, the funds can be passed on to heirs through death benefit provisions.)
My father is a great example. His mother and grandfather lived into their late 90’s. And at almost 76 years old, he is so healthy that he isn’t on a single medication – he doesn’t need blood pressure medication, cholesterol medication, nothing.* Furthermore, he’s always been the type of guy who wants to take care of everyone around him, not be taken care of – so he doesn’t ever want to be a financial burden on his kids. Longevity annuities are designed for people like my dad.
What are the Types of Longevity Insurance?
Longevity insurance is achieved typically through two types of annuities designed to provide insurance for a long lifespan: deferred income annuities (DIAs), and fixed-indexed annuities (FIAs) with lifetime income riders.
Longevity Insurance through Deferred Income Annuities
With a deferred income annuity (DIA), you deposit cash into an annuity, which in turn grows tax-deferred. However, rather than the income starting right away like with an immediate annuity, income begins at a date in the future — in some cases more than 20 years later, and typically not until the annuitant turns age 80. For example, an individual who is 62 years old now may opt for his or her lifetime income to begin when they turn 80. DIAs can be fixed or variable, and a death benefit rider typically ensures that your beneficiaries will receive principal and or income when you die.
Longevity Insurance through Fixed Index Annuities with Lifetime Income Riders
The second vehicle that provides longevity insurance is a fixed-indexed annuity (FIA) with a lifetime income rider. The fixed-indexed annuity grows your investment tax-deferred based on a market index such as the S&P500, while guaranteeing your principal in the event of a market downturn. The lifetime income rider guarantees lifetime income, the start date of which you can specify, and which is often ten to fifteen years into the future. FIAs tend to offer more flexibility than DIAs in that the income withdrawals can begin nearly any time after the initial premium is deposited, and additional premium can be invested over time.
What are the Types of Longevity Insurance?
Longevity insurance is particularly suited for those who anticipate living a long life due to a history of good health and family longevity. This is especially the case for folks who may also estimate an incoming cash flow need for long-term care or other types of health care related expenses later in life. In addition, because the funds from a longevity annuity are typically not accessed until one reaches age 80 or beyond, these financial vehicles are also well suited for those who already have income streams set up for their initial years of retirement. Overall, owning a longevity annuity can provide the assurance that there will be an income stream available for an individual’s later stage of retirement — no matter how many years that may last.
