Longevity Insurance
A longevity annuity, also known as longevity insurance, is a type of deferred annuity designed to provide ongoing income in your later years. Typically you purchase the annuity around age 65 and begin the payout (or annuitization period) once you reach age 80 or so. The goal of using a longevity annuity is to ensure that your income will sustain you for as long as you live. For instance, if you buy longevity insurance at age 65, you may plan to begin receiving payments at age 85. It’s designed to provide income in the very latest stages of life, such as age 85 and beyond. Normally, a candidate for longevity insurance will be someone in good health with a very long life expectancy.
If you do not live long enough to begin receiving payments or if you pass away before the full value of the longevity annuity is paid out, any remaining annuity payments may be returned to your account and left to your designated beneficiaries. Some annuities may include this provision or offer it at an extra cost.
Purchasers of longevity insurance typically make a one-time premium payment when they are in their 60s or 70s. To generate a benefit of any significant size from this insurance by the time you reach your mid-80s, you may need to make a sizable contribution of $50,000 or more in the early years of your retirement. With longevity insurance, you essentially give up the security of having cash now (your premium payment) in exchange for the certainty of having a guaranteed income later (lifetime income payments).
Under regulations finalized by the U.S. Department of the Treasury in 2014, you can use up to 25 percent — or $130,000, whichever is greater — of an individual retirement account (IRA), 401(k) or other employer-sponsored individual account balance to purchase a qualifying longevity annuity.