A Longevity Annuity—Is it Worth the Risk?

Longevity Annuity

Retirement planning requires quite of bit of expertise in the area of investments, preferably starting early in a person’s life. The earlier a person plans, the easier his or her senior years will be. Today seniors have many options at their disposal to obtain retirement income. These include 401(K) disbursements, pensions, Social Security, and now the increasingly popular longevity annuities. As the lifespans of seniors continue to elongate with advancements in today’s medical technology, it is easy to see why a longevity annuity is desirable. Just what are these annuities and are they worth the risk they pose?


What Is a Longevity Annuity?

A longevity annuity is an investment into a future payout that does not occur until the investor becomes at least 70.5 years old. These are “payments for life” that help to protect people from outliving their money, which is a common concern. A one-time premium is invested into the annuity.  It is usually a substantial sum. For example, some companies require a minimum of $50,000. The money can come from a 401(K) or a private IRA. The payouts begin when the person reaches the designated age on the contract.

Some people start collecting as soon as they are eligible while others wait until they are much older and incapable of gaining income in any other way. No matter when and how the person opts to begin receiving payouts, the income comes in regular amounts for the remainder of life. In general, people invest between 10 and 25 percent of their nest eggs into an annuity, leaving the remainder for other investments in order to diversify and account for any risks that may come up.


What Are the Benefits?

There are many benefits to be realized from a longevity annuity despite the risks involved. These benefits include:

  • Insurance against running out of money no matter how long-lived a person is
  • Insurance against the costs of long-term care, which can be very expensive the older a person gets
  • Income for random services around the house as a person ages and becomes unable to perform certain necessary tasks
  • Guarantee of income later in life when Social Security and other income sources are not reliable or guaranteed


What Are the Risks?

As with any investment, there are risks that come along with longevity annuities. These risks include:

  • Inflation can greatly affect the buying power of money, as payouts do not adjust for inflation.
  • Given the unpredictability of life and death, the investor may pass away before the payments begin. There is no compensation available, and heirs will not inherit the money invested in the longevity annuity.
  • Pricing and payouts are based on a unisex formula. This can harm both genders. Men typically have shorter lifespans, which means they could die before the payouts begin.


Offsetting the Risks

Longevity annuities may be worth the risk because of the instability of any other form of retirement income available to aging seniors today. To offset the risks, there are certain provisions to put into place to ensure that the money is not lost if someone dies before payouts begin, or to set a fixed increase amount should inflation greatly impact the buying power of money received. Of course, just like any other insurance, these provisions will come at a higher premium, but if they mean additional protection, they may be worth the cost.


People are living longer and there is no way to predict just how long anyone will live. Taking a portion of retirement savings now and hedging it against the chance that a person may live longer than expected may be a chance worth taking. Outliving one’s projected life span even by a few years can mean a very long, dreary time scraping by to make ends meet.

Most people in their elderly years can’t go back to work to obtain even short-term funds. This leaves them without viable options for income. This can wreak havoc not only on the elderly person’s life, but on the lives of loved ones as well. Because money makes the world go around, it is important to plan for any scenario. This includes the fact that elderly life can now extend for many years beyond expectations.

It’s best to shop around to find the best premium and lowest cost for longevity annuities. This can ensure the greatest protection of investment and the ever-expanding years of life.




CNN Money. What Is a Longevity Annuity? Retrieved from http://money.cnn.com/retirement/guide/annuities_longevity.moneymag/index.htm. Accessed on August 15, 2016.


Hopkins, Jamie. (April 6, 2015). 6 Reasons To Consider Buying Longevity Insurance. Forbes. Retrieved from http://www.forbes.com/sites/jamiehopkins/2015/04/06/6-reasons-to-consider-buying-longevity-insurance/#998ac022c582. Accessed on August 15, 2016.