What is Longevity Insurance?
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 is essentially a single premium deferred annuity with the payment period set to begin at the annuitant's later ages. For instance, if you buy longevity insurance at age 65, you would plan to begin receiving payments at 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).