Longevity Annuities – The “Big Game” in 2015
There’s a lot of talk about ‘outliving your savings’, but if your family has a history of living long lives, this may be even more of a concern. If you have a longer life expectancy, longevity insurance may be the solution that lets you keep your independence long after your 80s.
The limitation with immediate annuities and other retirement income sources is that they start paying out as soon as you retire. While the longer payouts may seem lucrative, consider that the total inflation in the last 20 years has been over 50%!
What is Longevity Insurance?
Life insurance protects your family against financial loss in case you die prematurely, but longevity insurance, as the name suggests, is a product designed to provide additional income as your senior years progress, typically after you’re 80 years old. It basically ensures that if you live long enough, you will have the money to maintain your lifestyle and expenses.
It is actually known as deferred income annuity (DIA), and the important word here is ‘deferred’. What happens with a deferred annuity is that payments begin in the future (depending on the time selected) whereas with a regular annuity, payments are made as soon as you buy it. The delay gives you the chance to get larger payments over time.
Why Should You Consider Longevity Insurance as a Retirement Option in 2015?
Longevity insurance is fast becoming a popular product and will be one of the most talked-about plans in 2015. This insurance plan is predicted to become more popular among people who will be retiring soon, those who live healthy lives and expect a long life span, as well as an important tool for financial advisors.
Data collected and analyzed by Morningstar Inc. and Wink’s Sales & Market Report shows that indexed annuity insurance products are being received well and have been seeing a steady increase in sales. The benefits of tax deferral combined with principal protection are bringing longevity insurance to the financial forefront already, and this trend will continue.
New guidance from the Treasury Department will also allow people to pair deferred income annuities with 401(k) target date funds. There is going to be a greater focus on policies that offer increased income in retirement, which makes qualified longevity annuities and indexed annuities the next big thing for 2015.
Types of Longevity Insurance
There are two types of longevity insurance to consider:
Longevity Insurance through Deferred Income Annuities (DIA)
Unlike immediate annuities, when you buy into a deferred annuity, the periodic payments only begin after a ‘deferred’ period, which can be upwards of 20 years. The exact date on which the payments start is defined by the terms of your contract, but will normally be when you turn 80.
Until that time, your investment grows at a fixed or variable rate, and the returns you earn are tax-deferred. Since you’ll probably be in a lower tax bracket by the time you start drawing returns, you would have a better income. If the annuity has a death benefit rider, your nominated beneficiaries will either a principal or an income after you die.
Longevity Insurance through Fixed-Indexed Annuities with Lifetime Income Riders
The second alternative for longevity insurance is to invest in a fixed-indexed annuity (FIA) that has a lifetime income rider attached. This type of annuity grows with interest that’s calculated based on a market index, like the Standard and Poor’s 500 (S&P 500). As with a DIA, any interest you earn is tax-deferred.
While it may seem like a risk, FIAs do guarantee part or your entire premium in case the market performs badly. The lifetime income rider gives you a guaranteed income that starts at time you choose. You can add additional principal whenever you like, and the income payments can start almost any time after you’ve deposited the initial amount, making FIAs more flexible in most cases.
Advantages of Longevity Insurance:
One of the biggest advantages of longevity insurance is the guarantee of an income source, usually in the later stages of retirement. This additional income can helps ease the pressure and worry of your savings dwindling, if you live longer than you predicted and made provisions for. When you reach the phase in life when you’re probably the most vulnerable, longevity insurance helps to strengthen your financial resources and maintain your income.
Old age doesn’t affect only physical capabilities, but cognitive ability too. Longevity insurances can also provide what’s termed as ‘dementia insurance’, which is a pre-planned financial structure that is less vulnerable to bad decisions. With the death benefits these insurance plans offer, you can ensure you spouse or any other dependents will have some additional income to support them after your demise too.
Disadvantages of Longevity Insurance:
When you purchase an annuity, you effectively give up control over the money you’ve invested as the premium. If you end up in a situation where you need the money to make other payments, you might not be able to access the amount. Even if your policy allows you to, the sum would probably be subject to hefty penalties.
Another concern is the manner in which the inflation protection itself works. If you’ve invested in an inflation-adjusted DIA, the rate of adjustment is applied only when the payments have begun. You have no way of knowing what the exact amount of the income they generate, so you can’t plan your expenses accurately.
As is the usual case with these matters, experts disagree on which is the ‘safest’ route for financial stability after retirement, especially towards the tail end. Whichever financial strategy you plan on following, focus on the expenses you’re likely to face.
Early on in retirement, it’s still possible to get back in the game and work for a little while longer, especially if it looks like you haven’t got a large enough nest egg. As your body ages, you may find with limited physical and cognitive capabilities, which is when having a steady income is more crucial.