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Retirement Annuity Better than Longevity Insurance?

Posted on September 28, 2009 by bobrichards

If you believe you'll have enough income for most of your retirement, it is possible to guarantee your unexpected long life with 'longevity insurance'. This product is a reformulated deferred annuity which guarantees a steady income stream starting at a predetermined future date. It warrants your current consideration because of its unique features and we can compare it to a more traditional retirement annuity.

Longevity insurance, a type of fixed annuity, provides a fixed income typically starting at age 85. Given that it pays a fixed income for life, it is similar to any retirement annuity. However unlike a retirement annuity which ge6s purchased when the income is needed, the guarantee of longevity insurance calls for you to make an initial investment 20 years earlier - at age 65. You can make a single premium deposit at 65, or come up with a series of level premium payments which will be completed before the annuity company begins payments. Money within the contract accumulates tax free.

Your payouts start when you turn 85 are usually fixed. They can cover you OR you and your better half for as long as you live.

Social Security Life Expectancy tables indicates a 65-year-old male has an additional 17 years of life and a female an additional 20 years (50% ff the people will die before the average life expectancy and 50% after). Based on these kinds of life expectancies, a 65 year-old has about a 50% probability of not living long enough to begin collecting on his longevity insurance at age 85. Comparable to a retirement annuity, if you die early on, you don't collect (with a retirement annuity, you will receive payments until you die). but the payments can be cut should by a premature death). With such a circumstances that make longevity insurance less appealing, longevity product variations are offered. As an example, your longevity insurance may possibly provide an amount that can be paid to your beneficiary if you expire before the payout age (a retirement annuity provides a similar option called "life with term certain)."

Here's an example of longevity insurance that will payout at age 85 - for a $10,000 purchase at age 65. At age 85 (if the investor is alive) the insurance pays $710/mo for the remainder of your life. If the investor has died, the investment is gone.

What might be an alternative using a retirement annuity?

If you put in the $10,000 in a deferred annuity for 20 years, at a theoretical 3% growth rate, you'd accumulate $18,000. If you then annuitized at $710 per month, you could take $710/mo out for only 25 months and the contract would be exhausted. In other words, the longevity insurance beats the retirement annuity for security and there's a reason its called "insurance."  The retirement annuity provides more flexibility in that if no comitment were made until age 85, one could then deposit $57,500 into a retirement annuity to receive a lifetime income of $710 monthly (male). So there are pros and cons to each choice.

 

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    Filed Under: Annuities for Income

    About bobrichards

    Bob Richards
    Editor | Involved in Various Marketing Positions within the Financial Services Industry

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