Certainly, it raises questions like: How healthy will I be? What will my quality of life be? And, above all, will I run out of money?
A product called longevity insurance can help eliminate that last fear from your mind.
But how long do I have to live for longevity insurance to pay off? What happens if I die before seeing a dollar from the policy?
Understand how this type of insurance works below
What is longevity insurance?
One of the biggest challenges of saving for retirement is that you don’t know how long you will live. You do your best to save and plan, perhaps even with some margin. But you can’t predict what your health and longevity will be like. These two factors can strongly influence how much money you spend and whether you will run out of it before you die or have very little to receive?
Longevity insurance reduces the financial risk that comes with living an especially long time. Typically, longevity insurance is an annuity that starts paying out at a predetermined age, which is usually between 80 and 85 years old.
In the United States, 65-year-old men can expect to live another 17 years, while 65-year-old women can expect to live another 19 years. This is on average, according to Statista. But how do you know if you will skew the averages and reach 90 or even 100 years old?
How does longevity insurance work?
Longevity insurance is not designed to cover your early retirement years. In fact, in most cases, you can start paying for longevity insurance around that time.
Payments typically begin at age 85. In this case, if you die before reaching 85, you will lose the money you spent. Otherwise, on your 85th birthday, you will start receiving payments each year.
If you live a long time, the payments will far exceed what you initially put into the annuity. When you die, the annuity payments stop.
Where can I get longevity insurance?
As with any type of insurance, it’s best to shop around when you’re ready to obtain longevity coverage. Researching ensures that you get the best rate and return when it’s time for your payments.
Here are some companies that offer this type of insurance:
• Allianz
• Guardian
• MassMutual
• MetLife
• Mutual of Omaha
• Nationwide
• New York Life
• Pacific Life
What are the biggest benefits of longevity insurance?
• Provides a deadline for using your retirement fund. If your longevity annuity starts paying at age 85, you can calculate a burn rate of your savings until your 85th birthday. This way, you can spend your saved money more freely in case of a long life. In other words, insurance like this can allow you to spend and enjoy more during retirement;
• Prevents you from becoming a financial burden to your family;
• Offers very generous annual payments. Example: a 65-year-old who invests $100,000 in a longevity annuity, with payments starting at age 80, could potentially receive about $2,000 to $3,000 per month for the rest of their life;
• Protects against inflation. Even if your Social Security check and your retirement nest egg can cover your basic needs very well when you are 65, if you reach 90, inflation may affect your purchasing power. Longevity insurance can be a good way to protect against this issue. Some insurances even offer payments that increase with inflation.
What are the biggest disadvantages of longevity insurance?
• Possible waste of money. If you die before the payment period begins, you will lose all the money you paid to the insurer.
• Even if you live long enough to start receiving payments at 85, you won’t hit your break-even point for several years. It’s unlikely to become something financially positive for you, and it wasn’t designed for that.
Longevity insurance can be a financial luxury. If you are 70 years old and already need to juggle to stretch your retirement savings, investing money in a policy that may never yield a return can seem completely unfeasible.
You might also think it’s unlikely that you will live to, say, 95 years old. So, if we were playing a board game, we would ask: why play when you know the insurer has such a big advantage?
For many people, however, the guarantee of an income is worth it. If this is your case, consider purchasing longevity insurance early in retirement so you can enjoy your retirement years with peace of mind and eliminate potential financial stress at the end of your life for yourself and your family.
Source: Clark.com