Life Insurance: Is Longevity Insurance Right for You?
Longevity insurance offers protection against the possibility of outliving your bank account.
Actor and comedian George Burns touched on one of the practical difficulties of aging when he said, "I'd go out with women my own age, but there are no women my own age." While Burns may have been in short supply of lady friends, many retirees also have another, more pressing problem: insufficient retirement savings.
Americans are living longer. Since 1950, the average lifespan has increased by some 20 years. And recent data indicates that an American born in 2006 has a good chance of living to celebrate her 80th birthday. Certainly, there are positive aspects of this trend, but it does create the need for more diligent financial planning.
Insurance companies are attempting to alleviate this problem with a product called longevity insurance. Designed for purchase when you're between 55 and 65 years of age, longevity insurance promises fixed lifetime payments that begin when you turn 85. Essentially, this is a fixed annuity contract with a deferral period of 20 or 30 years.
Because these policies are purchased so far in advance of when the payment stream begins, the premiums tend to be quite low. According to LongevityQuotes.com, an annuity that makes lifetime monthly payments of $2,500, starting immediately, will cost you about $185,000 in premiums. But if you're 65 years old and you purchase a longevity policy that pays $2,500 monthly, the premium is only about $31,000.
The risks associated with longevity insurance, however, are not trivial. First, the insurer's obligation to you ends when you die, even if that happens to be before you receive any benefit from your policy. Secondly, longevity payments aren't adjusted for inflation, which could undermine the value you receive from the investment. In light of these drawbacks, critics say you're better off deploying the $31,000 in the stock market for 20 years. Assuming a 6 percent after-tax return, that strategy would leave you with a portfolio valued at about $100,000.
Look to your elders
Consider these factors when evaluating whether you need a longevity policy:
- Your savings. The first step is estimating how long your retirement savings will last.
- Your family history. If you have grandparents and great grandparents who lived well into their 90s, it's reasonable to assume that you may do the same.
- Your health/lifestyle. Smoking didn't hold back Jeanne Calment, who once held the Guinness Records' title of "oldest living person," but you may not be so lucky.
- Your risk tolerance. If you prefer a sure thing, longevity insurance could be the way to go. It may end up costing you more, but you'll have the security of knowing those lifetime payments will be there if you need them.
Longevity insurance definitely doesn't make sense for everyone. But if you believe that you might outlive your savings and most of your friends-just like George Burns-this is one retirement planning option that might serve you well.