What is Longevity Insurance

Definitive Guide to Longevity Insurance

What is Longevity Insurance?

You need to consider Longevity Insurance prior to retirement. What is longevity insurance? I’m glad you asked!

We all know the greatest fear in retirement is running out of money. Obviously the longer you live, the greater the chance you run out of money. In fact, longevity risk is the main risk in retirement, as longevity is the great multiplier of risk: all risks increases with longevity.

Longevity insurance is not a product. Perhaps longevity planning would be a better phrase, however, planning in this sense is too broad. “Longevity planning” encompasses wellness, accessible housing, planning for cognitive decline, healthcare and many other non-financial objectives of age.

What is longevity insurance? Let’s start with a definition.

 

What is Longevity Insurance?

Longevity insurance is not a product. It is the acknowledgment that, if you live a long time, all other retirement risks increase! From a purely financial standpoint, the longer you live, the more assets you require.

Longevity insurance begins with social security planning. Yes, social security is the first step to ensure adequate resources if you should live a long life. Social security optimalization for a long life must be considered before you buy any annuity or other longevity insurance product. Delaying social security is the most cost-effective way to guarantee an ongoing, cost of living adjusted stream of income that lasts as long as you do.

Beyond social security, withdrawal rate and product allocation must also be optimized for longevity. Here, you need to understand how withdrawal rate, sequence of return risk, asset allocation, and other products (such as life insurance an annuities) interact over decades of de-accumulation.

Next, the risk of long-term care increases with age as well. Long-Term Care planning is an important consideration. This may or may not include Long-Term Care insurance.

The bread and butter, however, of longevity insurance is in fact annuities, which are insurance products. Don’t fear annuities; just fear the complicated, expensive, advisor-sold annuities where you are not sure about the purpose of the money. We will discuss these annuities below.

So, what is longevity insurance? It is setting up the entirety of your assets to support you should you live a long life.

 

When Should You Consider Longevity Insurance?

If you have a family history of longevity, it may be a good time to consider what you would do if you lived to be 100. Actually, the younger you are now, the earlier you should start to plan for longevity. Who know what medical advances we might see in the next decades?

Whenever you are considering retirement, the time is right to consider longevity insurance. If you want Long-Term Care insurance, the earlier you can sign up, the better off you may be. Optimally, you may consider traditional Long-Term Care Insurance in your mid-fifties.

For annuities, well, it depends on the type. This is where things can get complicated! If you are considering accumulation annuities, you can start funding them any time. They often have riders which allow you to annuitize (or not) the money into a life-long income stream.

Deferred income annuities including QLACs will likely be funded in your 60’s or 70’s. Too much can happen during the deferral period to consider funding irrevocable products too early in life.

Immediate income annuities can be turned on anytime.

 

Where Does One Find These Products?

There are some on-line sites and calculators for longevity insurance planning. See below

 

Why Do I Need Longevity Insurance?

This is the most important consideration: why do you need longevity insurance?

Let’s think about this two ways.

If you are liability matching (which is also called bucketing, or time segmentation), it may be nice to plan to fund your retirement, say, before 85 and after 85. That is, you will assign your money different tasks: to fund your lifestyle before 85 and then after 85. There are, of course, sources of income that will continue before and after this point, like social security, pensions, and annuities. But perhaps you have a bucket of money that will fund your needs before 85. Then, when you turn 85, a DIA and a QLAC kick in that fund the rest of your life. How nice is it to know you have pot of money to blow before you turned 85? And then income turns on when you are 85 to provide a further life-long stream…

Conversely, you could plan on the retirement spending smile. Here, you know that spending decreases over time until it starts increasing again (due to medical and frailty expenses) later in life. You could add on some retirement income that kicks on later in life, or Long-Term Care Insurance, to cover those expected expenses as they increase.

 

Longevity Risk: The Risk of Outliving your Assets

So, there are many ways to address longevity risk. Let’s look at some products.

 

Longevity Annuities

Back in 2016, Kitces predicted that longevity annuity would become a standard planning tool. While this is yet to happen, there is more and more academic research that points out that annuities do better for most folks than bond so. That is, you can use annuities as bond-replacement for a portion of the bonds in your asset allocation, and because of mortality credits, you have increased odds of success and may even leave more to your heirs. You need to invest in stocks and decrease your allocation in bonds as a result of the annuity.

 

DIAs

Deferred income annuities are good annuities! That is: they are simple (not complex), inexpensive (not fee laden), and easy to shop for. All of this means that insurance salesmen don’t like to offer them, because they don’t make much money off them.

With a DIA, you take a lump sum of money and give it to the insurance company in exchange for future income stream. The longer you defer the payments, the more you get back in return.

 

QLACs

Qualified Longevity Annuity Contracts are good annuities too! These are like DIAs in your 401k or IRA. They come with some extra whistles. Please read more about these products in order to understand them.

 

Longevity Insurance Calculators

Since insurance agents don’t like to sell longevity insurance, you might as well buy them on line. You can price shop and look at longevity insurance calculators here and here.

 

What About Longevity Insurance for Your Parents?

If you are concerned that your parents may not have enough money to survive late retirement, there are also some interesting products to consider. Look at AgeUp.

Apparently, there are also products by MassMutual, Nationwide, BluePrint Income, and Kindur that allow you to purchase longevity insurance for your parents. Buyer beware, as I haven’t reviewed these products. The concept is interesting, though.

 

What are the Advantages of Longevity Insurance?

The big advantage of longevity insurance is that it guarantees your income for life. You can buy annuities these (with different tax treatment) in your brokerage accounts or in your pre-tax retirement accounts. Another big advantage can be deferral of taxes until the income stream begins. This might allow some partial Roth conversions or other advanced planning strategies.

Also, there is no investment risk which can be huge for folks who are unable to tolerate any market volatility without losing sleep.

Finally, knowing you have a source of income that will kick in later allows you to spend your other sources of money more freely. Future money tree!

 

What are the Disadvantages?

Of course, there are tradeoffs as with any decision you make in retirement planning.

There is lower expected growth with these products than with 100% equities. Generally, these products are bond-alternatives rather than stock alternatives.

If you die early you lose the money. But that is why you get mortality credits and why these products are more efficient than buying bonds for your own portfolio.

 

Summary- What is Longevity Insurance?

Don’t forget that delaying social security is the cheapest longevity insurance on the market. No other form should be considered until after you have optimized social security.

Next, consider all of you assets and figure out your withdrawal strategy in retirement, and how to create income in retirement.

Most folks need to consider what will happen if they should live a long life. Longevity is the great risk multiplier. Think of every other retirement risk you have, and then double it because you live a few extra years.

It may be expensive to live a long life, but it is better than the alternative.

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5 Comments

  1. Great article David; do you still generally recommend these annuity products for “super-savers?” At what point do you consider someone “self insured” where they won’t need them?

    • The nice thing about super savers is that they can do whatever they want to do. It might be a story of risk at that point. If you are market adverse, you can put money in annuities. If you are not market adverse, you can still use annuities and lower you bond allocation and still expect to come out on top!

  2. Thanks for another great article, David.
    It seems to me that since annuities are insurance products, they are priced so that if the average, or expected, result happens the insurance company will make an acceptable amount of money. This means that you should expect to get a poorer return on the money you put into an annuity if you do not live at least as long as the average person in your longevity pool, meaning you die early. In that case, it’s not you that has lost out, it’s your descendents. Whereas if you buy an annuity and you live longer than average, you get the benefit of not having financial worries late in life. When I think about it this way, by purchasing an annuity I am pushing the risk onto my descendents and the insurance company.

    • As long as you increase your equity amount by counting annuities as part of your bond allocation, your heirs actually improve their situation with an annuity. Academically, if you die early or if you die late, you leave more behind with an annuity. So the risk to your heirs is for you NOT to have an annuity. By having one, on average they will get a higher inheritance. By not having one, on average it will be lower, but the standard deviation is much greater.

      • I must be missing something, because it seems to me that if you die right after you buy a Life-only SPIA you will leave less behind than if you didn’t buy the SPIA. I agree that if you invest more aggressively (because you have the SPIA), then you could eventually leave more to your beneficiaries because of the higher expected growth rate (you showed this in a previous blog post), but it takes awhile to grow back the money that is put into the SPIA. I think the charts in your previous blog showed that.

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