Longevity Risk

DEFINITION of 'Longevity Risk'

The risk to which a pension fund or life insurance company could be exposed as a result of higher-than-expected payout ratios. Longevity risk exists due to the increasing life expectancy trends among policy holders and pensioners, and can result in payout levels that are higher than what a company or fund originally accounts for. The types of plans exposed to the greatest levels of longevity risk are defined-benefit pension plans and annuities, which guarantee lifetime benefits for policy or plan holders.

BREAKING DOWN 'Longevity Risk'

Average life expectancy figures are on the rise, but even a very small change in life expectancies can create severe solvency issues for pension plans and insurance companies. Precise measurements of longevity risk are still unattainable because the limit of medicine and its impact on life expectancies has not been quantified.

RELATED TERMS
  1. Longevity Derivatives

    A class of securities that provides a hedge against parties that ...
  2. Pensionable Service

    The period of service, expressed in a yearly figure, for which ...
  3. Pension Fund

    A fund established by an employer to facilitate and organize ...
  4. Unfunded Pension Plan

    An employer managed retirement plan that uses the employer's ...
  5. Pension Adjustment Reversal - PAR

    A numerical calculation in certain Canadian pension plans that ...
  6. Fully Funded

    A pension plan that has sufficient assets needed to provide for ...
Related Articles
  1. Financial Advisor

    Longevity Annuities: A Salve for Volatility?

    Recent market volatility has led some investors to take a second look at longevity annuities. Here's when they are a good idea for clients.
  2. Financial Advisor

    How Advisors Can Help Address Longevity Risk

    Financial advisors can help clients manage longevity risk with a variety of strategies and products. Here's a look.
  3. Financial Advisor

    How to Help Clients Plan for the End of Life

    Advisors who can show their clients the real costs of longevity and then provide practical solutions.
  4. Retirement

    The Pros And Cons Of Pension Maximization

    Pension maximization can be an effective solution to the single versus joint life payout dilemma that many retirees face. But, there are several factors, such as tax and investment matters, that ...
  5. Retirement

    Pension Plans: Pain Or Pleasure?

    Employees have a love/hate relationship with this retirement option.
  6. Financial Advisor

    Pension Annuity vs. Lump Sum: Which is Best?

    Which pension distribution option best serves your client, a pension annuity or a lump-sum payout?
  7. Retirement

    Longevity Insurance for a Comfortable Retirement

    Don't face a retirement that goes on long after your money runs out. Longevity insurance guarantees you income once you reach age 85.
  8. Retirement

    Picking the Best Longevity Insurance

    What you need to know before buying a "reverse life" policy.
  9. Retirement

    How Safe Is Your Pension?

    A 2014 law permits some private pension plans to reduce benefits. How to figure out if your retirement income is endangered.
  10. Retirement

    America's Frozen Pension Dilemma

    Unfortunately, there are several factors that have eroded the presence of pension plans in America, and workers need to be prepared to replace that expected income for their retirement years. ...
RELATED FAQS
  1. The company I am receiving my pension plan from has just filed bankruptcy. Could ...

  2. Can I draw out or sell my straight life annuity?

    I have a pension plan through PBGC. I have my benefits form that shows how much I can draw. I am retired and disabled. What ... Read Answer >>
  3. What is pension maximization?

    Pension maximization refers to a strategy for choosing a payout option at the time of your retirement. Employees near retirement ... Read Answer >>
  4. What is a longevity annuity?

    Understand all the characteristics of a longevity annuity contract, the purpose of a longevity annuity and what type of investor ... Read Answer >>
  5. Who bears the investment risk in 401(k) plans?

    Who actually bears the investment risk in a pension plan depends on the type of pension plan that is employed. In a broad ... Read Answer >>
  6. Why are insurance companies and pension funds considered financial instruments?

    Find out why insurance companies and pension funds are considered carriers of financial instruments, and what role they play ... Read Answer >>
Hot Definitions
  1. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  2. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  3. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  4. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
  5. Weighted Average Life - WAL

    The average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding. Once calculated, ...
  6. Real Rate Of Return

    The annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other ...
Trading Center