Longevity Insurance | What Is It? & Do I Need It?

These days, Americans are living longer than ever.

While this is generally a good thing, it’s real problem for retirement planning.

You’ll need to stretch your savings over a longer period of time which can be very hard to budget.

To make matters worse, very few workers have access to pensions or other plans that offer guaranteed payments for life. To make sure they don’t run out of money, many Americans are turning to longevity insurance.

What is Longevity Insurance?

Longevity insurance makes sure you always have some income during retirement. It’s insurance that protects you against you living too long and running out of money.

To buy this type of insurance, you need to deposit one lump sum payment with an insurance company. Then, once you reach a certain age, you will start receiving monthly payments from your insurance for the rest of your life.

It doesn’t matter how long you live; you’ll keep receiving your monthly payments.

If you die before reaching your payout age though, you won’t receive any money (unless you add a life insurance rider, which we’ll cover in a minute.)

One of the important features of longevity insurance is that it delays your payments until the future.

Before this product was launched, insurance companies only sold plans that started payments right away. By delaying payouts, you give more time for your money to grow so you’ll receive more later on.

How does Longevity Insurance Compare to Life Insurance?

While longevity insurance is sold by life insurance companies, it is actually quite a different plan.

In fact, it has pretty well the opposite structure. With life insurance, you make a small payment to the insurance company each month. When you die, your heirs get the payout from the plan. With longevity insurance, you give the insurance company a large, one-time payment.

In exchange, you’ll receive many small payments sometime in the future. This is because longevity insurance isn’t life insurance; it’s a type of annuity, which is a long-term investment contract.

How Do I Set Up a Plan?

To set up longevity insurance, you need to transfer over a lump sum of money. Typically, investors transfer over money from a retirement plan like a 401(k) or IRA. You need to decide how much you want to put away for this long-term investment. To help you decide, the insurance company can give you an estimate of how much you’d receive per month in the future in exchange for your lump sum payment.

When you set up your plan, you’ll also have to decide on when you want to start receiving payments. When these plans first came out, you used to only be allowed to pick age 85 or later. Now, you can pick whatever age you want for payments. However, the earlier you start taking money, the less you’ll receive each month. Once again, your insurance agent will show you the difference.

Other Features

You can also customize your longevity insurance with a few other features. One decision is whether you want inflation protection or not. As time goes value, the purchasing power of the dollar goes down; $100 was worth a lot more 30 years ago than today. Inflation will also eat into your monthly income from these policies. If you add inflation protection to your insurance, your payments will get bigger over time to match inflation. The tradeoff is that you’ll receive less per month at the beginning.

If you are worried about dying early and wasting your contribution, you can also add a life insurance rider to your policy. If you died before receiving payments, your heirs would receive a lump sum of money. In exchange, your future income payments will be lower.

What are the Advantages of Longevity Insurance?

The big advantage of longevity insurance is that it guarantees your income for life.

Very few investments do this. If you kept all your money in stocks or in the bank, you could try budgeting but ultimately there’s a chance you would run out of money. With longevity insurance, this wouldn’t happen.

In addition, you don’t have to worry about investing with these products. The insurance company is completely responsible for your rate of return. If the market does badly, the insurance company still needs to come up with your payments. If you’re looking for a hands-off way to invest some money, this is an excellent way to do it. All you have to do is purchase the insurance plan, and that’s it.

Longevity insurance also is good for taxes on your investment earnings. As long as your money is in the contract, you don’t pay taxes on your growth. You only need to pay income tax on your gains once you start taking out money.

What are the Disadvantages of Longevity Insurance?

Longevity insurance does have some problems. On average, these investments grow your savings by less per year than stocks or bonds. This is because insurance companies only will invest your money in very safe, guaranteed assets. You’ll potentially receive less money than if you invested yourself. Interest rates are also very low today so by buying into a contract, you’re locking in a low rate.

Longevity Insurance is a perfect example of the old adage, “No risk, no reward.” These investments have almost zero risk, but as an investment, there are plenty of other options that will net you more cash. You should not rely on a longevity insurance investment account to give you the money that you need, but it can be a nice additional source of income.

Another problem with longevity insurance is that you may not get any money. If you don’t live until your payment date, you won’t receive any income. Of course, you could add life insurance to your policy, but then you’d receive less income per month.

Suitability

Adding some longevity insurance to your retirement plan definitely makes sense, especially if you don’t have a pension. This way you know you’ll always have some money coming in no matter how long you live. It’s a good idea to put somewhere around 5 to 15 percent of your savings in one of these plans for long-term savings. Then, you can feel more comfortable investing the rest of your money because you know you’ll always have some guaranteed income in the future.

Longevity insurance is just one way that you can give you and your family the financial security that they need. We know that managing your finances can be a difficult task, and one important part of that is your life insurance.