Longevity Insurance 101

How a Deferred-Income Annuity Can Prevent You from Outliving Your Money

Longevity Insurance 101
May 16, 2016

Retirees fear running out of money, and rightly so. This can happen to you in three ways – you fail to accumulate enough retirement assets, unexpected expenses drain your retirement funds, or you outlive your expected lifespan (and therefore, your money).

You can reduce the possibility of the last one by purchasing a deferred-income annuity. When this type of annuity is designed to provide income in the later years of retirement, typically age 85, these annuities are known as longevity insurance.

You purchase this insurance through a lump-sum payment, usually in your 50’s, to be paid out as an annuity at a future date. Thanks to new rules from the Treasury department, retirement funds such as 401(k)s and IRAs can now be used to purchase these annuities with up to 25% of the funds in the retirement account (capped at $125,000). Minimum distribution rules for the retirement programs were amended to prevent inadvertent early triggering of annuity payments.

In effect, you are building your own partial pension – converting a portion of your defined contribution plan to a guaranteed benefit plan. By buying sooner, deferring benefits until later, or putting in more funds, you increase the size of the eventual guaranteed payments.

Longevity insurance can also provide a partial alternative to long-term care insurance – it is unlikely to cover all the costs should you need long-term care, but does not tie up your money specifically toward long-term care that you may not need.

Of course, there are downsides, as with any financial product.

  • Unused Funds – Standard longevity insurance is “use-it-or-lose-it”, meaning the insurance company keeps the unclaimed funds. You can purchase cash-return options that return unused premiums, and other add-ons like inflation riders, but eventually, the cost becomes prohibitive compared to the return.

    Keep in mind that insurance companies make money on these products as well – otherwise, they would not be offered.

  • Poor Relative Returns – If you purchase deferred annuities using 401(k) or IRA funds, over the long term, you are likely to receive lower returns on the funds you transferred.

    Depending on interest rates, inflation, and potential performance of other investments such as equities, in the end you could accumulate enough wealth investing your money elsewhere over the required timespan that longevity insurance would be unnecessary.

  • Emergency Needs –Tying up funds with longevity insurance reduces the IRA/401(k) funds that are available to you in early retirement for emergencies, such as uncovered medical conditions.

  • Company Stability –If you do buy, buy from a well-established company, but remember – just because these annuities are sold by some companies that are 100+ years old does not mean these companies cannot go bankrupt.

Those are the main financial and actuarial factors, but the other factor – perhaps the primary one – is your peace of mind. Are you more concerned about the possibility of running out of money in your later years, committing assets that you may need in case of emergency earlier in your retirement, or the possibility that you are missing out on investments with a greater return?

In order to determine if longevity insurance is right for you, you have to consider the above factors as well as how likely you are to live beyond the average age. It is wise to consult a financial planner as well to optimize your sources of retirement income and help you consider tax ramifications and other strategic concerns.

As with everything, you pay extra for certainty. Find the best approach that gives you peace of mind and retains the best balance of risk and return.

MoneyTips is conducting a survey of hundreds of retirees to find out how they live today and how they prepared for retirement. We are also surveying working Americans who need to get ready for the next chapter in their lives. Read the preliminary results and take part – we’ll send you the results to help you prepare for the future!

Winnie Sun is a registered representative with, and securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Sun Group Wealth Partners, a registered investment advisor and a separate entity from LPL Financial.

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