Hopefully you’ve already started planning and saving for your retirement, no matter what your current age. But what if you are blessed with an exceptionally long life? Are you saving and investing enough now to provide for a comfortable lifestyle if you live into your late 80s? What if you live to be even older? Though it might seem morbid to consider how long you are likely to be alive - according to the Social Security Administration, a man of retirement age is likely to live on until age 84, while the average woman of retirement age has an excellent chance of living to be 86 years old. Without advanced planning, you might face a retirement nobody wants - one without enough money.

What is Longevity Insurance?

Longevity insurance is the catchier name for an advanced life deferred-income annuity. In a nutshell, before reaching age 65, you pay for a future income stream which won’t begin to provide payments until you reach 85. Once limited in availability, the IRS and US Department of the Treasury recently approved new tax rules that greatly expand the reach of longevity insurance. You are now allowed to use up to 25% of your IRA or 401(k) (up to a maximum of $125,000) to purchase the deferred-income annuity, providing you begin to collect the income by age 85. The hope is that potential retirees will take advantage of this opportunity to safeguard their advanced old age with a steady source of income.

How Does Longevity Insurance Work?

Purchasing longevity insurance is generally quite straightforward. You typically make a large lump payment while still in your 50s or 60s, although buying younger is to your advantage. The older you are when you buy the insurance, the less you will receive in annual payments when you reach age 85. Because women typically live longer than men, they pay a higher rate for longevity insurance, so if you are female, it’s even more advantageous to buy the annuity well in advance of your expected retirement. Once you reach age 85, you begin receiving fixed monthly payments from the insurance company.

Pros and Cons of Deferred-Income Annuities/Longevity Insurance

As with most things in life, there are both good and bad aspects to longevity insurance.

On the plus side:

  • You will have income in your very old age, which can be comforting, or even life-saving.
  • Longevity insurance might be able to take the place of long-term care insurance.
  • You can spend money right after retirement without worrying it will leave you in danger of going bankrupt later on.

Some of the negatives include:

  • Although you can pay extra for a policy that provides a refund to your heirs should you die before reaching age 85, in general, longevity insurance is use-it-or-lose-it. If you die before age 85, the insurance company keeps the money.
  • The lump sum you pay for the policy is money that is removed from your retirement portfolio, and unavailable for use should some emergency arise.
  • There is a possibility that your policy’s insurance company could fold before you reach your payout.

Is It For You?

Only you – along with your financial adviser – can make the final decision about whether or not longevity insurance is right for you. If you already have significant investments and savings, have paid off your mortgage or expect to pay it off before retirement, will receive a large pension at retirement or are simply comfortable with your retirement preparations, you probably don’t need to invest in longevity insurance. It’s also not a prudent choice for anyone suffering with a life-threatening illness or in poor health.

On the other hand, if your parents and grandparents lived well into their 80s and 90s, you don’t have significant retirement savings already, you won’t receive a pension, or you expect to have large payments such as a mortgage continuing into your advanced old age, a longevity insurance plan might offer you peace of mind.

Bottom Line

While you cannot know in advance if you will make it to age 85 and beyond, you can take steps to ensure that you’ll be able to live comfortably if you do reach that ripe old age. Consider adding longevity insurance to your retirement plan if you want to breathe easy when facing a long future that's likely to include expenses you haven't otherwise covered.

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