longevity insuranceLongevity insurance is perhaps one of the best ways to protect against outliving your income.  We have long advocated this strategy when combined with fixed income from Secondary Market Annuities as the most efficient way to lock in guaranteed lifetime income available in he marketplace today.  See this Prior Post on the subject.

It works like this: for a lump sum premium now, you purchase a defined lifetime income stream starting at age 85.  If you are 60 now, the 25 years of deferral before the income stats gives the insurance company a long time to work with your premium.  They also benefit by years of, well, mortality risk.  That is, the risk that you will die.

Annuities are basically life insurance in reverse- live long, and prosper… thus, payout rates are relatively low for people who buy annuities too young, and if they die early, it can be a bad deal.  But buy an annuity late- like one that starts at age at 85– and the payouts are fantastic!

Here’s a recent WSJournal article on the topic.

A growing number of insurers are rolling out a relatively new breed of deferred annuity that allows policyholders to boost income by postponing payments for several years.

The concept has started to catch on among Americans with pension envy. But people who purchase these policies lock in a smaller income when interest rates are low than they otherwise would.

Like an immediate annuity, these policies allow purchasers to convert a lump sum into a pension-like stream of income for life. But while an immediate annuity starts issuing payments almost instantaneously, these require policyholders to pick an income start date from one to 40 or more years in the future.

The advantage is that when payments begin, they are bigger than what you would get with a regular annuity. Currently, a 55-year-old man paying $250,000 for an immediate fixed annuity can get about $14,000 a year for life, according to Northwestern Mutual Life Insurance. But with a deferred income annuity that starts issuing payments at age 65, he can get $22,000.

In recent months, insurers including Massachusetts Mutual Life Insurance, Northwestern Mutual and New York Life Insurance have introduced these products.

In February, the Treasury Department issued a proposal to make it easier for people to buy so-called longevity insurance products—which start payments at, say, age 80 or older—in 401(k) and individual retirement accounts.

Economists say it can make sense to put a small portion—for example, 10% to 15%—of your nest egg into such a policy upon retirement to protect yourself from running out of money from age 80 or 85 on. But insurers including New York Life and Northwestern Mutual say that with pension plans falling by the wayside, a growing number of buyers are purchasing these policies in their 50s as a way to secure a pension substitute in their 60s and beyond.

“In 2008, people saw their 401(k) balances get decimated. Now, they want certainty,” says Tim Hill, a consulting actuary and principal who specializes in annuities at actuarial consulting firm Milliman.

Of course, there are downsides. As with most fixed annuities, you must surrender your principal to the insurer, which keeps the money if you die before the payments begin. (If you’re willing to settle for a lower income, you can ensure your heirs will receive a lump sum or series of payments.)

Moreover, given today’s ultralow interest rates, the payouts on these annuities are near multiyear lows. If inflation heats up, their purchasing power will be reduced.

As a result, some insurers allow policyholders willing to accept a lower initial income to raise annual payments. MassMutual, for example, permits adjustments of 1% to 4% each year. On Oct. 1, Northwestern unveiled its Select Portfolio Deferred Income Annuity, which gives policyholders a raise if the company issues an annual dividend.

 

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“For all time periods and for all portfolios, the addition of the annuity leads to a decline in the portfolio failure rates.”

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