The insurance industry doesn't aggressively promote it, but there is a high-risk brand of insurance that protects you against outliving your bank account. It's called 'longevity” insurance, and here is how it works.
In short, if you have a history of good bloodlines or just feel healthy and lucky, you can buy a longevity insurance plan with money down now and recoup that money, with interest, 20 years or so down the road.
Here’s an example. Let’s say you’re 65-years old and are mulling the probability of your living well into your 90s. To protect against outliving your savings, you can buy a longevity policy for $10,000 and, after waiting 20 years and making to age 85, begin collecting on a monthly annuity of $700—for the rest of your life. If you do the math, and manage to stay alive, you can recoup your entire $10,000 original investment in well under a year-and-a-half, based on the example given above. (Note: These numbers are estimated and that insurance companies have a fairly wide range of policy values, down payments, and accrual formulas).
But hold the phone, especially if the doctor’s on the line with bad news. The actuarial numbers work against about half of Americans (especially males), making longevity plans a genuine hit-or-miss effort. According to numbers from the Social Security Administration, the average life timetable for a 65-yearold man is 16.1 years—well short of the magic “85” mark needed to cash in on the longevity insurance. In Las Vegas parlance, that means even odds—50-50—that you’ll reach age 85 if you’re even a healthy 65-year-old male. To further decrease the financial odds, you can’t withdraw any of your longevity policy money until your 20 years are up.
Of course, in a worst-case scenario, if you don’t make it to age 85, then you’re out the entire value of the policy – you can’t bequeath it to your spouse or other loved ones, with one caveat. Some (very few, quite frankly) insurance companies allow you to purchase a death benefit that, while reducing your monthly income if you do make it to old age, providing a payout to your surviving spouse. The Hartford (Stock Quote: HIG) is one insurer that offers a death benefit on longevity polices.
Obviously, longevity insurance isn’t for everybody. You could bypass the longevity insurance and bet on the stock market – as many senior citizens do, even in these troubled times. There are other options, like deferred annuities, longevity insurance may have trouble gaining traction. But if you’re a firm believer that you’re a future member of the century-club, then a longevity insurance policy can make good sense.
If you do opt for such a policy, buy from a solid insurer that you know will be around in 20 years. Moody’s and Standard & Poor’s both have good rating systems for insurance companies, and they’re worth a look. Also, keep your initial outlay to 10%-to-15% of your total financial assets.
After all, you don’t want to bet the farm that you’ll reach your late 80s or 90s—but you can sure bet a piece of it.
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