Physical Address
304 North Cardinal St.
Dorchester Center, MA 02124
Physical Address
304 North Cardinal St.
Dorchester Center, MA 02124
Retirees often worry about outliving their savings, and one potential solution to this concern is longevity insurance. This type of insurance is a deferred income annuity that operates almost the opposite of life insurance. If you live beyond a predetermined age, you are entitled to regular “paychecks” until you die. In this blog, we will explore what longevity insurance is, how it works, its pros and cons, and whether you need it.
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 is often 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.
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:
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 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.
Longevity insurance has some obvious benefits, but it has drawbacks as well.
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.
Knowing how much income you will need—often 20 years in the future—can be tricky. Cons of buying longevity insurance include:
Not everyone needs longevity insurance. You may not need it if:
According to a Morningstar 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:
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.
For any mortgage service needs, O1ne Mortgage is here to help. Call us at 213-732-3074 to speak with one of our expert loan salespersons. We are committed to providing you with the best service and ensuring your financial security.