Is Longevity Insurance for You?

You shopped carefully for life, car and homeowner’s insurance, and now it’s time to think about another type: longevity insurance.

This little-known type of insurance, or deferred annuity, protects against one of the growing dangers of retirement — outliving your money.

There are various types of policies, but a typical longevity policy is purchased after one turns 60 and begins paying a monthly income after the policy holder turns 85. An example from Metropolitan Life Insurance Company (Stock Quote: MET) shows that a 65-year-old could buy a policy for $50,000 which would provide $40,000 in annual income after the policy holder turned 85.

If that seems generous, it’s because the insurer knows many policy holders will die before they receive anything, and many others will not receive the payments for very long. And, of course, the insurer has 20 years of investment earnings to build up a fund before it begins payments.

The downside for the customer: once the premium is paid, the money is gone. You won’t be able to leave it to your heirs. Nor will you be able to draw on it if you change your mind. That might happen if your health deteriorated and you didn’t expect to make it to 85, or if your investments did well and the longevity policy seemed unnecessary.

Still, a longevity policy can provide a valuable safety net, as the payments continue for life. It would take a solid double-digit investment return for a 65-year-old to turn $50,000 into a $40,000-per-year income stream beginning at 85.

In addition to the basic policy, insurers offer variations to allow customers to hedge their bets. You can get a policy that starts payments as early as age 70 and includes a cost of living adjustment so the monthly payouts grow with inflation, for example. Some policies guarantee some income for a spouse, or a certain payout to heirs if the policy holder dies before the monthly payments begin. Additional provisions can easily double the policy’s cost.

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