Most people plan on an average life expectancy in retirement. As a matter of fact, when I project someone’s retirement income plan past age 90, they often give me a quirky look and say, “But I won’t live that long.”
“But”, I ask, “What if you do?”
Some aren’t concerned. They either plan on living an unhealthy life to assure they won’t be around, or they figure if they run out of money at that age, then someone else will have to foot the bill.
Others are quite concerned. They’ve had personal experiences with productive, long-lived seniors, and they wonder if that might be them one day.
For those, longevity insurance just might be the answer to “But what if you do?”
What Is Longevity Insurance?
When you buy longevity insurance, you pay a lump sum of money today, and the insurance company guarantees you an amount of monthly income at a specified future age, often age 85 or 90.
Cost Of Longevity Insurance
Bankrate.com has a an article 5 Ways To Make Retirement Savings Last in which they say that “typical policy might cost $25,000 at age 65 and pay out $3,000 per month beginning at age 85.” Upon verifying this with an insurance agent, it’s hard to figure out where they got their numbers… sounds a bit too good to be true.
Real costs are estimated below:
- For a male age 65:
- $100,000 buys you about $60,000 a year of income starting at age 85.
- $25,000 buys you about $15,000 a year of income starting at age 85.
- For a female age 65:
- $100,000 buys you about $48,000 a year of income starting at age 85.
- $25,000 buys you about $12,000 a year of income starting at age 85.
How To Use Longevity Insurance
Longevity insurance can serve several purposes in building a solid retirement income plan:
- Knowing you have a future floor of guaranteed income, you can comfortably spend more in your younger years, without fear of running out later.
- You could choose to invest other funds more aggressively, once again, because you know should you beat the mortality tables, your financial situation will still be solid.
- You could combine longevity insurance with a term certain immediate annuity, thus building a solid floor of guaranteed income to fund your retirement lifestyle.
Risks With Longevity Insurance
The biggest risk in purchasing longevity insurance is the same risk you face when purchasing any type of insurance; the credit risk of the issuing insurance company. Does the insurance company have the financial wherewithal to make good on their promise to pay?
You can reduce this risk in a few ways:
- Choose an insurance company that has high ratings.
- Purchase several smaller longevity insurance policies from a few different insurance companies.
What Do I Think Of Longevity Insurance?
Financial instruments are tools, and longevity insurance is another tool in the toolbox. I think it’s a great tool when used appropriately to create a floor of guaranteed income within the scope of a well designed retirement income plan.
Where To Buy Longevity Insurance
As of March 2010, I have not found a way to buy longevity insurance direct, which means you need to find a financial advisor who carries their insurance license, and has knowledge and expertise with this particular product. Use one of the Financial Advisor Search Engines to request an advisor who can specifically offer longevity insurance.
