A Solution to Your Worst Retirement Nightmare

By Deborah O'Malley, M.Sc. and Melvin Pasternak, Ph.D.
December 30, 2011

Did your paternal grandfather live to 97 and great aunt on your mother's side hit 93?

While you may be delighted with your wonderful genes, you should also be concerned about something that every retiree and pre-retiree worries about constantly as they grow older.

Outliving your retirement nest-egg.  

So what's one possible solution? Purchase longevity insurance.

Also known as a Longevity Income Guarantee, longevity insurance is a deferred fixed annuity that guarantees a lifetime of income payments.

Once you reach a certain age (typically 85), the plan sends you fixed monthly payments as agreed upon when you set up your policy.

Monthly income for the rest of your life! That seems like a no-brainer. 

But, as always, there's a catch. If you buy the insurance and then decide it's not for you, there's usually not an option to cancel. And, your family won't receive death benefits when you pass on.

As a result, longevity insurance can be a gamble. You're signing away a lot because you may or not live long enough to benefit from it.

Before you consider purchasing longevity insurance -- or discounting its relevancy -- here are some important factors to consider:

Can I get longevity insurance at my age?

Longevity insurance is generally geared toward people in their 50s and 60s contemplating retirement. The earlier in life you purchase the insurance, the lower your premiums and the more you'll end up receiving when -- and if -- you reach 85.

For example, if you're a healthy 55-year-old man and you put an initial $20,000 toward the insurance, at age 85 you'll receive approximately $11,000 per year, every year until you pass away.

But, if you wait until age 60, you might receive payments of only about $8,000 a year. And, if you don't buy the insurance until age 65, you would get only about $6,000 per year starting at age 85. The same annual payment decline applies to women. But, because women tend to live longer, they generally receive lower annual amounts than men. 

With robust annual payouts like these, it seems you can't go wrong. However, it's also important to remember that if you don't make it to 85, you won't receive anything at all.

Also, if you buy the insurance at age 55, the initial capital investment, plus annual premiums, means your money is tied up for 30 years -- until you turn 85. This capital could otherwise be put toward investments like preferred shares or bonds that provide regular interest for living expenses.

What's the big benefit?

If you do live well into your 90s, or beyond, you won't ever have to worry about having a certain base income beyond social security payments. While your normal retirement savings may run out after a time, longevity insurance provides you with monthly payments for as long as you live.

That fact should surely help you sleep well at night.

How long is the average person expected to live?

It may be helpful to know that most people tend to underestimate how long they'll live. According to the U.S. Census Bureau, average life expectancy for men and women in the U.S. in 1950 was age 68. By 2010, average life expectancy ramped 10 years, to 78.

By 2020, it's expected the average person in the U.S. will live to be almost 80. With advances in modern medicine, you'll want to make sure your financial portfolio keeps up with you. Longevity insurance may be one piece of the puzzle.

How long will I live?

Clearly, the longer you live, the more money you'll need to cover your retirement expenses. Longevity insurance makes a lot of sense if you think you'll live a long time. Unfortunately, there are no hard and fast rules for estimating your life expectancy. Your current health status, your lifestyle and the age at which your parents passed away are all influencing factors.

To "guesstimate" your life expectancy, you can use an online life-expectancy calculator, such as the one found here. If the prognosis looks positive, you may want to consider longevity insurance to help protect you from running out of money in old age.

Is there a premium involved with longevity insurance?

Most longevity insurance policies require you to pay an annual premium. Depending on your insurance provider, you may need to pay a higher premium as you age to receive the same benefits.

If your premium does not increase with age, make sure you're still adequately covered by finding out about the benefits you'll receive. Before purchasing longevity insurance, shop around to ensure you're receiving the best rate with the most optimal coverage.

And what about the threat of inflation?

Because of inflation, an item purchased for $5,000 in 1980 now costs about $13,700. Image how much this same item will cost in 30 years.

If you're considering longevity insurance at age 65 and have reason to think you might live until 95, make sure your plan includes inflation protection. This extra coverage will raise your premiums but is a necessity to ensure your insurance will adequately cover you in 30 years.

The Investing Answer: Before purchasing longevity insurance, consider these factors to determine if this kind of retirement coverage is right for you. Think about your life expectancy and your retirement needs. While it's never certain how long you may live, longevity insurance can provide a back-up nest-egg which will assuredly last throughout your golden years.