Outliving your money: The very idea might make your knees knock together.
A quarter of respondents named outliving their money as their single greatest fear about retirement, according to a 2011 survey from the Transamerica Center for Retirement Studies.
If you’re worrying about not saving enough for retirement or spending your savings too quickly once you retire, you may want to look into buying something called “longevity insurance.”
The basics of longevity insurance
Here’s how it works: You plunk down a one-time check for, say, $50,000, and that entitles you to receive a fixed monthly payout for the rest of your life beginning at the age in the future you choose — commonly age 85. It’s called longevity insurance because this financial product is designed to insure against your living longer than your money will last.
Although its branding is pretty new, “longevity insurance is just another name for a single-premium deferred annuity,” says Beth Pickenpaugh, a financial planner in Columbus, Ohio. Traditionally, people bought deferred annuities in their 50s and started receiving their monthly payouts at retirement. But now that the public is living longer, the idea of delaying payments a couple of decades into retirement has picked up steam.
The prime advantage of buying longevity insurance is that you can plan your retirement with more certainty. If you’ve ever sat with a financial planner and tried to determine how long your money will need to last (90? 95? 100?), you’ll see the benefit. “The problem is, our clients refuse to tell us their date of death in advance,” says David Hultstrom, a financial planner in Woodstock, Ga. Once you know your needs are covered from age 85, making a financial plan becomes simpler.
Longevity insurance can also take the place of long-term care insurance and provide you with a steady income stream to help defray future caregiving bills.
Who should consider buying longevity insurance
Longevity insurance may be right for you if you meet one of these criteria:
You have or will have a pension, but it’s not indexed to inflation, so your buying power could really dwindle by age 85 or so.
You’re projected to run low on funds in your later years based on the amount you have in savings and expect to receive from Social Security and any other anticipated income. “I have run projections for clients with and without longevity insurance, and have found that some can stretch their money well into their 90s by allocating a portion of it to longevity insurance,” Pickenpaugh says. “These clients were slated to run out of money in their late 80s without it.”
Longevity runs in your family. Did your grandparents or parents live into their 90s? If so, your chances of seeing the big 9-0 are better than average.
What longevity insurance costs
How much you’ll pay for longevity insurance depends on your age and your gender. The older you are when you buy the insurance, the smaller the amount you’ll ultimately get each year, assuming the same initial purchase amount. That’s because the later you buy longevity insurance, the less time the insurer has to invest your money before it needs to start making payments to you.
With MetLife, for example, a 55-year-old man putting down $50,000 at age 55 would receive $52,500 a year starting at age 85. If he waited until 60 to make the purchase, he’d get $39,240 per year; a 65-year-old buyer would get $29,400 a year.
Women receive smaller annual payouts than men making the same initial purchase, due to their higher odds of living longer. A woman putting down $50,000 with MetLife at age 55 would see $41,400 a year at 85; if she buys at 60, she’d get $31,200; at 65, $23,520.
Drawbacks to longevity insurance
But before you rush into buying a longevity insurance policy, remember this: Not only are you taking that money out of circulation for 20 to 30 years — which shrinks your retirement portfolio and the amount you can start drawing down — there’s a chance you won’t even see the payout.
“The probability of a 55-year-old male being alive at 85 is only 30 percent,” Hultstrom says. “So you have about a 70 percent chance of not getting anything whatsoever on that.” Although the odds of women living to receive their payouts are higher, they pay for the privilege, as the previous example shows.
If you die before payout age, you (and your heirs) won’t receive any monthly checks. Some longevity insurance products do allow for a refund of the premium to your heirs if you die before payouts begin, but you’ll pay extra for this option.
Another drawback to longevity insurance: You’re gambling that the insurance company will still be around in a couple of decades to make those payouts. If your insurer goes under before then, there currently is no federal backup plan for reimbursements, and state guarantees vary. Nearly half of U.S. states limit annuity protection
to $100,000 of the contract’s value.
How to choose a longevity insurer
Experts recommend going with policies from companies rated highly for financial stability. Look for those in the top two tiers of the ratings scale at A.M. Best or Moody’s. (Visit A.M. Best’s Ratings and Analysis Center or Moody’s Research and Ratings page. You’ll have to create user accounts, but they’re free.)
But keep in mind that even a top-tier rating is no guarantee. “Triple-A companies are Triple-A right up until they’re not,” Hultstrom says.
Why you might want to wait
If you’re not quite ready to take the plunge to buy longevity insurance, it may pay to hold off for a couple of years. “Right now is not a great time to buy an annuity, because the payout proceeds are based on the current market rates,” Pickenpaugh says.
Translation: Once interest rates tick up again, you’ll get more bang for your longevity insurance buck.
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