Odds are growing that you’ll live past 85. But will your money last that long? And what if you make it to 95 or 100?
With lifespans lengthening, those nearing retirement may want to consider financial protection to guard against the possibility of outliving their money.
It’s now increasingly available in the form of longevity insurance, which usually involves giving a sum of money to an insurer in your 60s in exchange for monthly payments that start at 80 or 85 and continue for the rest of your life.
The little-known financial product is gaining new attention at a time when few have pensions and Congress is discussing changes to Social Security that could reduce future benefits. New York Life Insurance Co. began offering a policy in July, joining a handful of others including MetLife, Symetra Financial and The Hartford.
But it’s not just about insurance companies looking to make money off aging baby boomers. Retirement experts and some financial advisers say it can make a lot of sense for those who have enough savings to be able to spare a small portion in exchange for future monthly income that they can’t outlive.
“This is something that people ought to be thinking about as they approach retirement,” said Anthony Webb, research economist for the Center for Retirement Research at Boston College.
Longevity insurance is the relatively new term for an annuity designed to cover the latter years of retirement. An annuity is an investment product in which you typically pay an insurance company a lump sum and get back a stream of payments for life.
Certain annuities have sullied the category name for being complex and loaded with fees — mostly variable annuities, where the value can sink with stock market declines. But more financial advisers are touting annuities as a way to receive the guaranteed lifetime income that pensions once provided.
With the longevity annuity, income is fixed and starts at a specified future age, frequently 85.
Under MetLife’s “maximum income” version, for example, a woman who buys longevity insurance with a $100,000 lump sum at age 65 could receive annual income of $59,010 starting at 85. That wouldn’t be enough to cover a year of nursing home care, but as supplementary income it would go a long way toward covering living expenses.
Payouts are higher for men because of shorter average lifespans. A 65-year-old man purchasing $100,000 of insurance would get $73,580 annually from MetLife starting at 85.
If you die before payments start, the money you gave the insurance company is gone.
The insurers do offer alternate versions that guarantee death benefits to heirs, allow clients to start collecting income whenever they need it, even let them out of the contract. But those conditions can double the price paid.
Buying this protection serves dual purposes. It ensures a predictable stream of income for your later years, removing worries about having to depend on family members for financial assistance. And defining the exact time period that savings have to cover — say, from age 65 to 85 — allows retirees to spend more confidently and invest more aggressively without fear of running out later.
“If you have one of these that kicks in at 85, it becomes a much simpler problem of how to spend down one’s wealth,” said Webb.
The big downside, of course, is giving a pile of money to an insurer and hoping you and the company both are around in 20 years or whenever the benefits start flowing. Your best bet is to find a company with the best ratings by A.M. Best, Fitch, Moody’s and Standard & Poor’s.
Demand for this insurance is low so far. But rising life expectancy should help it grow. After all, for a reasonably healthy 65-year-old couple’s chances are 63 percent that one of them will live until 90, 36 percent that one will make it to 95 and 14 percent that one will reach 100, according to the Society of Actuaries.
The key is to remember it’s an insurance policy and not an investment.
Jason Scott, managing director of the Financial Engines Retiree Research Center, calls longevity insurance an efficient way of handling the risk of living a long time. “It’s really expensive for an individual to plan for a life that might last to 100,” he said.
Dallas Salisbury, 62, had no qualms about buying longevity insurance three years ago that won’t pay him a cent until his 85th birthday in 2034.
His health and family history both suggest that Salisbury, who is president of the Employee Benefit Research Institute in Washington, D.C., has an excellent chance of cashing in. Both parents lived past 93, and an aunt reached 104. He said he’ll recoup his original cost, not counting inflation, after a year of payments. And if he makes to 90, he’ll have reaped a 10 percent annual return on his money.
But even more important in his decision, he said, was the chance to lock in long-term financial certainty at a modest cost. He and his wife bought longevity policies with different insurers, spending 10 percent of their investment portfolio at the time. That means they can decide what to do with 90 percent of their assets between now and age 85 without worrying about holding back money for an indefinite number of years beyond life expectancy.
“Paying 10 percent for that type of certainty to me is worth it,” he said. “If you want to protect yourself against living a long time and running out of money, the only way of doing it is where someone else takes on that longevity risk.”
Longevity insurance should interest those of somewhat above-average income — roughly the 60th through 95th percentiles of the population, according to Webb, who also suggests buying some form of inflation protection with the policy.
Those from families with a history of longevity, are particularly good candidates for it. Even those who find it a good fit for their finances, however, aren’t advised to spend any more than 15 to 20 percent of their assets. And while the price is lower if you buy it younger, most experts don’t recommend getting coverage until you’re in your 60s. — AP