Thursday, September 29, 2011

Longevity insurance: Lifetime income if you live long enough


Odds are growing that you'll live past 85. But will your money last that long? What if you make it to 100? Indeed, as life expectancies rise, a growing number of Americans are spending more years in retirement than they counted on -- a positive trend overall, but one that also puts them at risk of outliving their assets. In financial jargon, it's called longevity risk.

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"Running out of money in retirement is going to be an increasing problem since a lot of people who used to have pension plans with lifetime income now only have defined contribution plans, like a 401(k). So they've got this lump of savings that they have to try and figure out how to make last," says Joseph Tomlinson, a Certified Financial Planner in Greenville, Maine.

With life spans lengthening, those nearing retirement may want to consider financial protection against the possibility of outliving their cash. It is now increasingly available in the form of longevity insurance, which usually involves giving a sum of money to an insurer when you are in your 60s in exchange for monthly payments that start at 80 or 85 and continue for the rest of your life.

New York Life Insurance Co. began offering a policy in July, joining MetLife, Symetra Financial, and the Hartford, among others.

But it is not just about insurance companies looking to make money off aging baby boomers. Retirement experts and some financial advisers say it can make a lot of sense for those who have enough savings to be able to spare a small portion in exchange for a future monthly income they cannot outlive.

"This is something that people ought to be thinking about as they approach retirement," said Anthony Webb, research economist for the Center for Retirement Research at Boston College.

Longevity insurance is the relatively new term for an annuity designed to cover the latter years of retirement. An annuity is an investment product in which you typically pay an insurance company a lump sum and get back a stream of payments for life.

Certain annuities have sullied the category name for being complex and loaded with fees - mostly variable annuities, in which the value can sink with stock market declines. But more financial advisers are touting annuities as a way to receive the guaranteed lifetime income pensions once provided.

With a longevity annuity, income is fixed and starts at a specified age, frequently 85.

Under MetLife's "maximum income" version, for example, a woman who buys longevity insurance with a $100,000 lump sum at age 65 could receive annual income of $59,010 starting at 85. That would not be enough to cover a year of nursing-home care, but as supplementary income it would go a long way toward covering living expenses. Payouts are higher for men because of shorter average life spans. A 65-year-old man purchasing $100,000 of insurance would get $73,580 annually from MetLife at age 85.

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If you die before payments start, the money you gave the insurance company is gone.

Insurers do offer alternative versions that guarantee death benefits to heirs, allow clients to start collecting income whenever they need it, or even let them out of the contract. But those conditions can double the price paid.

Buying this protection serves dual purposes. It ensures a predictable stream of income for your later years. And defining the exact time period that savings have to cover - say, from age 65 to 85 - allows retirees to spend more confidently and invest more aggressively without fear of running out later.

"If you have one of these that kicks in at 85, it becomes a much simpler problem of how to spend down one's wealth," Webb said.

Demand for this insurance is low so far. But rising life expectancy should help it grow. After all, for a reasonably healthy 65-year-old couple, chances are 63 percent that one of them will live until 90, 36 percent that one will make it to 95, and 14 percent that one will reach 100, the Society of Actuaries said.

Jason Scott, managing director of the Financial Engines Retiree Research Center, calls longevity insurance an efficient way of handling the risk. "It's really expensive for an individual to plan for a life that might last to 100," he said.

Longevity insurance doesn't make sense for the very rich or the poor, who have no wealth to spare. But it should interest those of somewhat above-average income, said Webb, who also suggests buying some form of inflation protection.

But even those who find it a good fit for their finances are not advised to spend any more than 20 percent of their assets. And though the price is lower if you buy it younger, most experts do not recommend getting coverage until you're in your 60s. However, before you decide that this type of investment is right for you, consider carefully all the advantages and disadvantages.

What are the Advantages of Longevity Insurance Annuities?

Some of the advantages include:
  • Longevity insurance may give a guaranteed income later in life when retirement funds may get stretched or start to run out.
  • This retirement planning solution can give a useful income boost at an age when expenses (i.e. medical and care costs) may be getting more expensive.
  • These options can be set up later in life which may suit those whose planning has started late or that may not have built up enough income for a long retirement.
  • These annuities are often cheaper to buy and give better returns than standard products.
  • Some can be set up to pay death benefits if the individual dies before their annuity matures.
  • Some products can give earlier payout dates if the individual wishes.

What are the Disadvantages of Longevity Insurance?

Some of the downsides to longevity insurance include:
  • Standard longevity annuities will only pay out if the individual reaches the age of maturity and may give no payment at all if they die before that date.
  • Arranging for the annuity to mature at an earlier age may increase the cost of buying the product and decrease the guaranteed income that is paid out.
  • Setting up a death benefit option can make these annuities more expensive to buy.
  • Many options will pay a fixed amount that will not rise with inflation so payouts may be worth less in the future.

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