- Longevity Insurance is a new name for an old concept
- New Treasury rules allow you to use IRA money without penalty
- But these investments are a "longshot" bet
Too many retirees are outliving their retirement accounts. Consequently, the insurance industry has created a possible solution. This product is called market called “longevity insurance” or, more accurately, a longevity annuity. You see, this is really just a new name for an old concept, the deferred annuity.
Unlike most annuities, which are purchased with a lump sum and begin paying out soon afterward, these policies typically don’t begin paying anything until some 10 or 20 years after you buy them. Sales of these annuities were up 35% last year from a year earlier.
The idea is that, if you outlive your life expectancy, you can receive fairly large annual payments in your later years for a relatively small investment upfront. Under Treasury’s new guidelines you can now direct 25% up to $125,000 of your retirement account into the purchase of an annuity which pays nothing until you are 80 or 85. After you begin annuity payments at the date selected, you receive a lifetime income. Any amounts that you allocate to the longevity insurance will be excluded from the Minimum Required Distribution (RMD) rules.
But there are downsides, too, as there can be with any annuity. According to one financial planner: "The problem is that there is a very good chance I won’t make it to 85, and then I get nothing. The basic concept here is that a ton of participants are going to die before they get a penny. Those that do make it are not going to get paid for very long before they die and forfeit their contribution to fatten up the payments to the fewer lucky survivors. Each participant is making a huge bet against his peers and on himself. If this were a horse race this would be called a longshot."
If you’re considering such a product, it’s a good idea to discuss integrating it with your current estate plan.