One of the biggest challenges of retirement planning is knowing how much retirement to plan for. In other words, if one retires at 65, should one plan to have enough money to cover 15 years, or 30, or even 40? Social Security mortality tables from 2007 indicate that the odds of a healthy 65 year old woman living to be 85 years old were over 50%. Lifespan expectancy continues to improve year by year, which is why people 90 or more years old make up one of the fastest growing segments of the U.S population.
On one hand, that 65 year old woman has almost even odds of dying before she reaches 85. If she postpones her retirement to build up funds to cover a longer lifespan, she might never get to enjoy her retirement at all. On the other hand, if she retires at 65 and then lives to be 85 or 90 or 95 years old, will she have any money left to live on?
Longevity insurance is one way to answer that conundrum. It is basically a single premium annuity plan where the buyer makes one large payment sometime near their retirement age in order to receive lifetime secure annual income starting when they are 85 years old. Longevity insurance gives the retiree a definite answer to the question of how many years of retirement to plan for.
Critics of longevity insurance object to the fact that once the initial premium has been paid, the money is gone. There is no residual value in a basic longevity insurance plan and no way to tap the premium amount if the buyer has an emergency need (such as medical expenses). They suggest that rather than tying up the funds in an annuity, the retiree can create a self-funded “annuity” by investing the same amount of money into a separate account, such as a Roth IRA. This preserves the value of the investment for emergencies and keeps it in the estate if the retiree dies before reaching 85.
The downside of self-funding is self-management. If retirees know they might tap the funds for non-emergency needs, they might prefer to have the money permanently out of reach. Another serious consideration is the issue of mental fitness and aging. Even if retirees are perfectly capable of discipline and money management early in their retirement, aging often undermines these abilities. Again, concern over that issue would be a reason to use longevity insurance.
One more issue with creating a self-funded annuity is that the fund would not be “bottomless.” It would only take a few years to exhaust the income and principal in such an account, which means that the self-funded annuity would not permanently cap the retirement funding problem the way a longevity insurance plan would do. It is true the retiree would probably have to live well past 90 before the funds ran out, which is not very likely, but the chance does exist.
Returning to the question: Who buys longevity insurance? Anyone who anticipates living well past 85 years of age and wants the security of assured lifetime income from a professionally managed and bottomless source might want to think it over.