Longevity Insurance: What Is It and Do You Need It?

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The thought of living past the age of 85 can be both exciting and terrifying.

It certainly evokes questions. How healthy will I be? How would you rate my quality of life? And most of 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 you have to live for longevity insurance to pay out? What does money expert Clark Howard think about it? And what happens if you die before seeing a dollar from your longevity insurance policy?

I’ll cover all those topics and more in this article.


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What Is Longevity Insurance?

Longevity insurance reduces the financial risk of living an especially long time. Typically, longevity insurance is actually a longevity annuity that starts to pay out at a predetermined age, often between 80 and 85.

One of the biggest difficulties of saving for retirement is that you don’t know how long you’ll live.

You do your best to save and plan, perhaps even with some cushion. But you can’t predict your health and longevity, two factors that can heavily influence how much money you burn through and whether you’ll run out.

Even if you have plenty of money, it’s tough to know how much you can afford to spend without knowing how long it needs to last.

“I’ll have people say, ‘Well, I don’t want to buy one of those things, because if I die tomorrow, I threw that money away,'” Clark says.

“And I’m like, ‘Yeah, that could happen.’ But would you rather worry about that or would you rather be in a position where you’re, let’s say, 82 years old and you’re like, ‘I never imagined that I’d live to 82. Nobody in my family lived that long.’ And you’ve got no money a,nd you’re too old to work. And you’ve got nothing to live on but whatever you get from Social Security.”

Americans are living longer every decade. In the United States, 65-year-old men can expect to live another 18 years, while 65-year-old women can expect to live another 21 years. That’s on average, according to Statista. (That’s on average, according to Statista and as of 2019. The overall life expectancy has declined in the United States since the onset of COVID-19.)

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You don’t have to skew the averages by much to reach 90 years old. Or even 100. Especially if the trend toward longer life expectancy continues.


How Does Longevity Insurance Work?

Longevity insurance isn’t designed to cover your early retirement years. In fact, in most cases, you may start paying into a longevity annuity around that time.

These annuities often kick in at 85 years old. In that case, if you were to die before your 85th birthday, you’d lose the money you spent on the longevity annuity. However, on your 85th birthday, you’d start to receive hefty payouts each year.

If you live especially long, those payouts will far exceed what you initially put into the annuity. When you die, the annuity payments stop.

“The insurance company actuaries know that most people are going to die before they hit that 85. So the people who live to 85 or longer are going to get a huge check every month, relatively speaking, from the longevity annuity,” Clark says.

“So whatever money you have before you’re 85, you can spend every last penny of it. Because you know your birthday gift when you turn 85 is you’re living on the insurance company’s money for all the years that remain.

“People are living a lot longer than historical, and as they get older, they have ailments. So they can’t really substitute work when they run short of money. So it gives you the ability to know you’re not going to be living in extreme poverty in retirement.

“The downside is if you wanted your kids to inherit anything, they just are flat out of luck. They inherit your memories, their memories of you — but no money.”

Don’t expect many insurance salespeople to pressure you to buy longevity insurance. It typically offers puny commissions and isn’t nearly as profitable as, say, whole life insurance.


What Are the Biggest Benefits of Longevity Insurance?

Here are some of the biggest pros of buying longevity insurance:

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  • Provides an end date for your retirement fund. If your longevity annuity starts to pay out at 85 years old, you can calculate your burn rate on your savings to last through your 85th birthday. That way you avoid being overly stingy with the money you’ve saved in case of a long life. It may allow you to spend and enjoy more of it.
  • Prevents destitution in case of old age. The thought of being in your late 80s, 90s or even beyond, with declining health and very little purchasing power left, seems miserable. Not to mention that it can become a burden for your family. A longevity annuity isn’t a financial cure-all. You’ve still got to finance your life until your payouts begin, but it can be an enormous advantage in case of an especially long life.
  • Nice-sized payouts. On average, people who purchase longevity annuities don’t live long enough to cash in many (if any) payments. Therefore the insurance companies offering these products can afford to pay a pretty nice annual stipend. When combined with Social Security and any other income source, you may find yourself easily affording a weekly trip to your favorite steakhouse and some nice cruises with your grandchildren.
  • Hedge against inflation. Even if your Social Security check and retirement nest egg can pay for your basic needs just fine when you’re 65, if you reach 90, inflation may do a number on what you’re able to afford. The income from a longevity annuity can be a nice way to hedge against that problem.

What Are the Biggest Downsides of Longevity Insurance?

Here are some of the biggest cons of buying longevity insurance:

  • Potential waste of money. If you die before the payout period begins, you’ll lose all the money you paid to the insurance company. Your payments will line the pockets of the insurer in addition to helping cover the payouts to those who live long enough to see them.
  • Odds stacked against a financial win. Let’s say your payout starts at 85 years old. That’s still longer than the average 65-year-old man can expect to live these days (and just shy of the life expectancy of a 65-year-old woman). Even if you live long enough to start getting payouts, you won’t reach your break-even point for a number of years. It’s unlikely to turn into a financial positive for you, and it isn’t designed to do that.
  • Could make an inheritance less likely. Clark’s line of thinking is that the year you start getting annuity payouts is the target year you need to plan to make your money last. That could prevent you from leaving an inheritance to your children or grandchildren. Then again, it could also prevent them from having to pay hard-earned money to take care of you if you live for an unusually long time.

Final Thoughts

Longevity insurance can be a financial luxury of sorts. If you’re 70 and already needing some luck to stretch your retirement savings by another decade, throwing money into a policy that may never pay out can seem out of reach.

You may also think to yourself that it’s unlikely you’ll live to be, say, 95. In gambling terms, why play the game when you know the house (the insurance company) has such a huge edge?

However, for many people, knowing that no matter how long you live, you’ll get a generous stream of income — even once your retirement savings run out — is worth assuring.

Consider buying longevity insurance early in retirement so you can enjoy your retirement years and take away what is potentially a big financial stress late in life for you and your family.

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