In addition to an immediate fixed annuity, another method of protecting yourself from running out of money in your latest years is through the use of longevity insurance.
With a typical immediate annuity, you might begin receiving payments at age 65, 70, or 75 or somewhere in between, whichever you choose.
Longevity insurance works like a long-delayed immediate annuity. For instance, if you buy longevity insurance at age 65, you won’t begin receiving payments until age 85. It’s designed to provide income in the very latest stages of life, such as age 85 and beyond.
How Does Longevity Insurance Work?
If you live past age 85, the longevity insurance pays you an income for the rest of your life. If you die before age 85 (or whenever the longevity insurance will start its payments), your heirs may not get any money back or they may receive a full or partial refund of your premium, depending on the payout options you choose. Normally, a candidate for longevity insurance will be someone with a very long life expectancy.
Purchasers of longevity insurance typically make a one-time premium payment when they are in their 60s or 70s. To generate a benefit of any significant size from this insurance by the time you reach your mid-80s, you may need to make a sizeable contribution of $50,000 or more in the early years of your retirement. With longevity insurance, you essentially give up the security of having cash now (your premium payment) in exchange for the certainty of having a guaranteed income later (lifetime income payments).
This material is provided by MyRetirementPaycheck.org, a site from the National Endowment for Financial Education that helps people explore all of their retirement decisions.
Next Avenue Editors Also Recommend:
- Baby Boomers Plan to Keep Working but in a Different Way
- How Annuities Protect Against Longevity Risk
- Should You Buy Longevity Insurance?
- Make Sure the Money Lasts With a ‘Retirement Paycheck’
Next Avenue brings you stories that are inspiring and change lives. We know that because we hear it from our readers every single day. One reader says,
"Every time I read a post, I feel like I'm able to take a single, clear lesson away from it, which is why I think it's so great."
Your generous donation will help us continue to bring you the information you care about. What story will you help make possible?
© 2012 National Endowment for Financial Education. Used with permission. All rights reserved.