What Is Longevity Insurance?

Quick Answer

Longevity insurance is an annuity product designed to ensure that retirees will not outlive their savings no matter how long they live. However, the assured lifetime income comes with some drawbacks and is not for everyone.

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Retirees worried about outliving their savings might wonder about longevity insurance. Longevity insurance is a deferred income annuity that operates almost the opposite of life insurance, in that if you live beyond a predetermined age, you are entitled to regular "paychecks" until you die.

Longevity insurance can be purchased with a lump sum or with payments over several years. Once you pass an age that you choose—typically 80 or 85—the guaranteed payouts begin.

It can be especially useful for retirees reluctant or afraid to spend retirement savings because they are worried they might need the money later, especially if they live to an older age than they had saved for. It also can remove worries about market risk, or fears that there could be a downturn just when money is needed.

What Is Longevity Insurance?

Longevity insurance is a type of deferred income annuity designed to guarantee a monthly income, beginning at a date that is typically years into the future. It often is purchased by new retirees. The payout typically ends when the beneficiary dies.

It can be sold as an individual policy, with payments that begin at, say, 85. If the beneficiary dies before then, there is no payout. That's the simplest and most straightforward option, but not the only one. Married people may choose a policy with a joint payout that continues as long as either spouse lives, for example. There are also annuity types that return premiums to your heirs if you die before or shortly after payments begin, and payouts that increase with inflation.

Longevity insurance can assure retirees who withdraw some of their savings in early retirement that they will have enough money in later retirement. However, they will likely have to pay a significant sum upfront to get that guaranteed income stream later. (For example, a 65-year-old man might pay $100,000 for a guaranteed lifetime income of $35,562 per year starting at age 80.)

Many new retirees do pay upfront. But there is flexibility to buy longevity insurance with monthly, annual or other payments.

Parting with a big chunk of retirement savings for something that won't pay off—if it pays off at all—for many years has resulted in longevity insurance being fairly unpopular, with sales of deferred-benefit annuities accounting for less than 2% of total annuity sales. That does not mean longevity insurance is necessarily a bad option, just that it's important to carefully weigh the potential risks with the benefits.

Because each annuity purchased as longevity insurance is a customized contract, knowing exactly how much you can expect to pay is difficult. Online calculators can show you what various scenarios would cost, including paying upfront, paying over time and differences in how much you'll receive in payouts. In general, annuities that include return of premium, inflation protection or coverage for a spouse increase the cost or result in lower payouts.

How Does Longevity Insurance Work?

Longevity insurance pools the risk that you will live much longer than average. You buy an annuity, either over years during your work life or as a lump sum, and at a certain, predetermined age, benefits start.

A qualified lifetime annuity contract (QLAC) can be funded with money from an individual retirement account or other qualified retirement savings. There is a $200,000 per person limit, and payments must start no later than age 85. They can be especially useful once you reach age 73 and must start taking required minimum distributions from retirement savings. Putting a portion of retirement savings into a QLAC can keep that money growing tax-deferred until payouts begin.

It isn't advisable to make early withdrawals from your retirement accounts (taking money out prior to age 59½), as you will pay a 10% early withdrawal penalty, and any funds you withdraw may be taxed as income.

Longevity insurance is a fully customized contract, and there are a lot of factors that can impact how much you will pay. Some of these factors include:

  • Your age when you bought the annuity
  • Your sex
  • Years before the annuity begins to pay out
  • Whether you choose a survivor benefit
  • Whether your beneficiaries will receive anything if you die before or early in the payout phase

According to the Financial Industry Regulatory Authority, individual payouts may be larger than you would likely get otherwise because some people who purchase longevity insurance (without a rider for return of premium) won't receive anything from their insurance. The premiums they paid instead increase the pot of available money available for beneficiaries who live much longer than expected. So, it's not just the purchaser's money that is invested, but also those who do not live to collect benefits.

Pros and Cons of Longevity Insurance

Longevity insurance has some obvious benefits, but it has drawbacks as well.

Pros of Longevity Insurance

Longevity insurance can take some of the worry out of retirement planning, because it offers regular paychecks starting at an age when your money might otherwise be about to run out. For many, it's easier to enjoy earlier retirement without fretting about having enough money for late retirement.

Pros include:

  • It offers peace of mind that you won't outlive your retirement savings.
  • You can add a spouse.
  • You may feel freer to spend down your retirement savings, knowing that you will have a steady income at, say, age 85.
  • Some types offer some tax advantages, such as deferred growth sheltered from required minimum distributions.
  • You can protect your savings from market risk.
  • It can help fund a health care need, such as assisted living.
  • Your heirs may be able to recover premiums paid if you die before or even during the payout period.

Cons of Longevity Insurance

Knowing how much income you will need—often 20 years in the future—can be tricky. Cons of buying longevity insurance include:

  • The financial health of the company you purchase from can determine whether you receive the promised payout.
  • Fees and expenses can be high.
  • Annuities can be complex—including some that are tax-advantaged and various riders for protection of premium refund.
  • It can reduce the amount of money available to your heirs.
  • There can be surrender fees if you decide to end the contract, or opportunity costs if you keep money in the annuity.

Do You Need Longevity Insurance?

Not everyone needs longevity insurance. You may not need it if:

  • Your Social Security benefit plus pension or retirement funds can easily cover your expenses.
  • You have reason to believe you won't live long enough for a payout to cover your premium.
  • Paying for an adequate policy would strain your finances now or leave you without an adequate emergency fund.

According to a Morningstar study study published in 2022, people whose inflation-adjusted income sources—typically Social Security and pension—provide relatively high levels of income relative to expenses don't need to buy longevity insurance. Previous studies have also shown that people with lower incomes tend to benefit most from longevity insurance. But those are generalities. Individual circumstances vary, and a financial advisor can help you determine the best moves for you.

You might need longevity insurance if:

  • You are unsure your money will last if you live past age 80 or 85.
  • You are afraid to spend much of your retirement savings enjoying yourself because you are worried you'll need the money later.
  • You are uncomfortable with market volatility and risk and want a regular paycheck.

The Bottom Line

Longevity insurance can give retirees an endpoint to their retirement savings, removing an element of uncertainty. However, it still requires some guesswork about how much monthly income will be needed, inflation, the need for long-term care and the health of the company holding the annuity.

If your savings are likely to run out if you live an unusually long time, it could make financial sense to get longevity insurance. And if you are going to be too worried about needing money in your later years to enjoy life in early retirement, longevity insurance may give you the psychological comfort to do it.

Annuities can be complex, and longevity insurance particularly so, because there are so many ways to structure them. If you're considering buying annuities, consulting a financial professional can be a good idea.