A longevity insurance annuity could provide a useful income in later years, giving some the reassurance of a guaranteed retirement income for life. What is longevity insurance and how does it work?
What is Longevity Insurance?
Longevity insurance provides a retirement income for later years (i.e. 80+). It mitigates the worry that people will outlive their savings and investments as they get older. This solution is often favored by those approaching retirement with some spare investment cash that they can afford to tie up for the future.
How Does Longevity Insurance Work?
Taking out longevity insurance basically involves buying a deferred annuity to provide an income later in life. This kind of purchase is typically made towards retirement age with payments usually starting from the age of 80+. This gives a guaranteed income at a time when many worry that they will have spent other retirement savings or that they will have increased spending needs.
The individual makes a lump sum payment to buy the annuity. The cost of buying on a deferred basis is generally cheaper than buying an immediate annuity as payments will not start for a number of years. Although most products are designed to start paying out once the policy holder is over 80, it is possible to arrange earlier start dates.
Why do People Buy Longevity Insurance?
Life expectancy rates are rising, leaving some seniors with decades of retirement to fund. Many, however, have not built up savings on a scale large enough to last for as long as they may live. Plus, some worry that their expenses will rise as they get older. The costs of healthcare, for example, may be very different at 80 compared to what they may be at 60.
Will a Longevity Insurance Annuity Suit Everyone?
In its basic form, longevity insurance only really works if it gives some return on investment. A regular policy may not have to pay out if the individual dies before they reach the target age. Setting up a policy to pay early or to leave death benefits may increase the initial costs. Plus, some may simply find it hard to find the spare cash to fund this kind of purchase close to retirement.
Things to Consider Before Buying Longevity Insurance
It is important to fully understand the advantages and disadvantages of longevity insurance before choosing this as a retirement savings solution. Some also find a longevity calculator a useful part of the decision making process.
Keep in mind also that there are other types of annuities that can be used to fund retirement and these may be worth investigating. If the primary concern is rising health care expenses in older years, then long term care insurance may work as an alternative for some.
Carol Finch - Carol Finch is the Topic Editor for Retirement Planning, Budgeting, E-Commerce & Technical/Business Writing on Suite101.
Join the Conversation