A relatively new product, known as longevity insurance, allows you to put money on those odds — and the longer you can beat them, the more money you stand to collect. But the point isn’t about making a ghoulish gamble. The insurance is a way to protect you from running out of money should you live to a ripe old age, though it turns your retirement years into something of a contest with the insurance company.
At its core, longevity insurance is simply a deferred annuity: you hand over a pile of cash to an insurance company, usually around the time you retire. But the guaranteed payments begin much later, usually around 80 or 85, and last for the rest of your life. As with homeowner’s policies and other types of insurance, the idea is to give up a smaller amount of money now, for a potentially larger payout later.
Though many retirees are loath to part with thousands of dollars for a benefit they may never receive, some baby boomers may decide it’s worth the gamble. Consider this: for a healthy 65-year-old couple, there is a 50 percent chance that at least one of them will live until 92, according to the Society of Actuaries.
Even if you don’t live that long, the insurance removes some of the uncertainty of how much you can afford to spend in retirement. If you know you have a guaranteed stream of income that will kick in at age 85, for instance, you may be able to spend down your portfolio a little more aggressively before then. The idea is to buy enough insurance so that you’ll be able to maintain your lifestyle after the payments begin.
“I think it is going to be one of the most important investment vehicles of the next decade,” said Harold R. Evensky, an independent financial planner in Coral Gables, Fla., who has been critical of annuities in the past. “There is no question that a large percentage of the public will be facing a problem maintaining their lifestyle in retirement as daily expenses and inflation erodes their nest egg.”
As attractive as the product sounds, at least in theory, there are several caveats. The biggest drawback, obviously, is that you may never recoup your initial premium. Some companies allow your heirs to receive some or all of your money, but adding those features can double your costs. It may be more cost-effective to view the annuity as a pure insurance policy.
“Unlike other annuity products, this has more in common with fire insurance,” said Christopher O. Blunt, an executive vice president at New York Life. “To leverage it properly, you don’t want to think of it as an investment. You want to think about the risk of running out of money and how devastating that would be, and how much money you would have to put up to take that risk off the table.”
Given the odds, it’s cheaper to buy longevity insurance than to build, say, a bond portfolio that will produce the same amount of income, experts said. It is also significantly less expensive than buying an immediate annuity, whose payments begin right away. It’s hard to generalize, but Jason S. Scott, the managing director of the Financial Engines Retiree Research Center who has analyzed longevity insurance, said that retirees might consider carving out about 15 percent of their retirement savings to buy the insurance.
At the Hartford Financial Services Group, for instance, it would cost a 65-year-old man $18,425 to buy $1,000 in guaranteed monthly income that begins at age 85, compared to $23,272 for a woman. It would cost $33,203 to cover both partners’ lives — which is much less than the $211,000 they would need to buy an immediate annuity. The longer you wait to collect the income, the lower your premium.
There are risks to consider. Since your payments don’t begin for many years, perhaps even decades, inflation can diminish your future payments’ purchasing power. Social Security, which increases with inflation, will provide a partial hedge. But it may pay to buy a larger amount of income, especially if you believe most of your expenses will be vulnerable to inflation, said Mr. Scott of Financial Engines. If you don’t expect to receive the income for 15 years, you might increase the amount you need by 2 to 3 percent a year over that time period to arrive at an inflation-adjusted number, he added.
Another big question is the financial stability of specific insurance companies many years in the future. That’s why financial planners suggest buying annuities from several providers. Should a company fail, the states have guarantee associations that would provide coverage up to certain limits -- typically $100,000 to $250,000 -- based on the value of your projected annuity benefits.
Here is a look at what types of longevity insurance are available or coming soon:
This article has been revised to reflect the following correction:
Correction: November 15, 2010
An article in the Your Money special section on Nov. 5, about longevity insurance, a product that allows people to insure against outliving their retirement assets, described imprecisely the benefits of a state guarantee association should an insurance company fail. The association would provide coverage based on the value of the insured’s projected annuity benefits; it would not be based on the amount paid for the insurance and thus would not necessarily “pay back the amount you invested.”
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