Retirement Tips: Pick the Best Longevity Insurance
It's a nagging thought that concerns almost every senior citizen, and many a middle-aged person as well: What if I outlive my retirement savings? Longevity insurance is designed to help with that. Basically, it's a special type of deferred annuity: You buy the policy now; the payments start if you live past a certain age – typically 80 or 85.
The purpose is to “insure” that you will have an income stream, no matter how long you live. Because the policy pays out while you're alive, it is also often also called reverse life insurance.
When to Buy
Traditionally, people have purchased this insurance several decades before they want payments – typically, while in their 50s or 60s. But there are no hard and fast rules, just these general principles to remember:
- the sooner you buy, the bigger the payouts
- the later you activate your annuity, the larger the income stream
Of late, insurers have been marketing these policies to younger and younger clients. For example, scenarios provided by MetLife indicate that if a 45-year-old man made a $50,000 lump sum payment into its Longevity Income Guarantee product and began withdrawing at age 85, he would receive more than $60,000 in annual income. If he waited until age 55 to make the same payment, his annual annuity income at age 85 would be only half that: $30,619.
Types to Buy
Longevity insurance is typically purchased through one of two types of annuities: deferred-income annuities (DIAs) and fixed indexed annuities (FIAs) with lifetime income riders. A variation on the DIA, called the Qualified Longevity Annuity Contract, provides an option for you if you wish to purchase a deferred income annuity inside a qualified retirement plan.
The Deferred Income Annuity allows you to invest through a single lump-sum payment or over a long period of time. If you opt for the latter, the investment or savings period ends at some point (often retirement), but the annuity is not activated right away. Instead, the investment grows, tax-deferred, until sometime in the future (typically around age 80 or even 85). DIAs can be fixed or variable and can include a death benefit rider to ensure your beneficiaries receive proceeds when you pass away.
The Fixed-Indexed Annuity with Lifetime Income Rider grows based on a market index such as the Standard & Poor’s 500 with no risk to your principal. This means if the index underperforms, you do not lose your original investment. FIAs offer some flexibility over DIAs because withdrawals can be initiated just about any time after the initial deposit, with remaining premiums invested over time.
The Qualified Longevity Annuity Contract Option (QLAC) creates a longevity annuity within your qualified retirement plan – 401(k), 403(b) or IRA. This option circumvents the required minimum distribution rule that usually affects funds within these plans, so you don't have to withdraw funds until age 85 (instead of the traditional age of 70.5).You must, of course, comply with other IRS requirements in order to maintain the status of your QLAC. For more, see Understanding Regulations on Qualified Longevity Annuity Contracts.
Some Selling Points
- a relatively small initial investment gains a lot in subsequent income
- you can spend more freely in your early retirement years, since you've already guaranteed income later in life
- having annuity income simplifies the management of financial affairs
- you may not need long-term care insurance (see Longevity Insurance for a Comfortable Retirement)
- if the insurance company holding your annuity folds, you may lose your money
- annuities pay only if you reach the target age – unless you pay extra for a death benefit or spousal coverage
- payments are fixed, unless you add inflation protection – again, at extra cost
- fees can be high, cutting into your funds' growth rate (vs. other investments)
Doing Due Diligence
Investor.gov, a website run by the U.S. Securities and Exchange Commission, provides additional information about annuities, including a link to a National Association of Insurance Commissioners site where you can confirm that an insurance broker is registered in your state.
The Bottom Line
Since longevity annuities are designed to begin payouts later in life, they are best suited for people whose family history suggests a long lifespan.
They can also be appropriate for someone who wants the peace of mind of guaranteed income later in life, perhaps after regular retirement savings have been depleted.
But there’s much to consider before purchasing longevity insurance – no matter which type you decide on – so definitely consult with a trusted financial advisor before taking this important step.