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What is a Longevity Insurance Policy and How Should it be Used?

What is a Longevity Insurance Policy and how should it be Used?With average life expectancy climbing each year, there are millions of people out there that are now wondering how they’ll be able to support themselves when they get into their 80s and 90s. Because of this, many people choose to obtain a longevity insurance policy, which is the perfect solution to this problem. This type of policy is designed to start giving the recipient a “trigger date” of their choosing for when a recipient can start to receive their lifetime income payments. Basically, it is a deferred annuity with a very late start date, hence why it is considered for people who may be living into their 80s and 90s.

The most common date for these annuities to start is typically around 85 years old but can be altered depending on the recipient. Since this type of annuity is typically purchased with a single premium payment and starts at a deferred time, it is called a single-premium deferred annuity (SPDA). The great part about these policies is that, because they have yet to make huge waves within the insurance agency, rates are relatively low. These rates are also fairly low because of the long deferral period and the probability that the policy holder may not live long enough for payments to begin. It is also noted that these rates are lowest the earlier that the plan is purchased. For example, an article in 2011 noted that a man purchasing this type of policy at age 55 with an initial upfront premium payment of $50,000 would receive more than $50,000 a year after age 85. This same policy purchased only 5 years later at the age of 60 would pay out only $38,000 a year. Why does this policy pay out more the earlier that it is purchased? This is simply because the company issuing the policy will have your money for a longer period of time, meaning that their money will be returned on the premium from the day it is first purchased.

Does this mean that you should purchase this type of policy at this very moment? Not necessarily. It’s important to first keep in mind that a longevity insurance policy can be somewhat risky depending on your financial circumstances. For instance, by having to pay such a high premium, your investment portfolio will be significantly reduced, meaning that your income will also be reduced during the early parts of your retirement. Plus, you also need to be sure that you have a good chance of living long enough to see the age that your payments will currently start. Otherwise, you’re somewhat out of luck. Consider these numbers for instance. In general, a 65-year-old woman will live around 20 years longer while a 65 year-old man will live around 17 years longer. Keep in mind that these numbers are only going up, as the longevity of life increases. Your lifestyle, family health history, and your own history are all important considerations to keep in mind when deciding whether this is the right policy for you.

Despite the risks, this type of policy also carries a significant amount of benefits associated with it. For instance, this type of policy can be used as a fantastic estate-preservation tool. As medical expenses may get more expensive as you get older, this type of policy provides you with an added income stream for various expenses tied to your estate. Also, many of these policies include payments to beneficiaries in case the policy holder dies before the trigger date.

A longevity insurance policy can be a fantastic choice for anyone looking to ensure that they’ll be taken care of financially when they get into their older years of retirement. As with any other important decisions, take your time, look at your finances, talk with your family, and be sure to determine whether or not this is the best policy for you.

Byline

Karl Stockton writes for rentersinsurance.net. Learn more from http://www.rentersinsurance.net.

© 2012, Jen Carrigan. All rights reserved.

3 Comments

  1. Michael's Gravatar Michael
    August 14, 2012    

    Jen,

    I’ve been reading what I can about this, but nowhere do I find a list of insurance companies who offer a product. Can you point me in the right direction?

  2. Jen Carrigan's Gravatar Jen Carrigan
    August 14, 2012    

    Hi Michael,

    Insurance is largely regulated at a state level and therefore insurance companies that offer a product in one state may not offer it in another. Additionally, companies who are eligible to offer the product in a certain state, can drop that product at any time from their product listing. Essentially, the policies are annuities and any Company in the business of offering annuities (if eligible to offer the products in that state) may offer a “longevity insurance policy”.

    New York Life has been very public about their offerings and the volume of policies that they have sold.

    The only way to determine which companies offer this type of product in a consumer’s respective state is to contact insurance agents who are licensed to offer products in that state.

    Since I am not an insurance agent, I’m not privy to the current policies that insurers are willing to underwrite (which may change at any time).

  3. January 28, 2014    

    I always suggest longevity insurance for my clients. As most of my working class clients have most of their money in IRAs, it would be “visionary” to provide the leveraged benefits in life and hybrid products (even with special taxation codes attached). Like taxfree distributions for LTC premiums or taxable LI distributions for IRA owned life policies. The need is great.

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