Should You Buy a Longevity Annuity

Most people worry about having enough money to fund their retirement. From 401k plans to IRA’s, money market accounts to annuities, there are multiple ways to save for retirement. One relatively new option in the mix is a longevity annuity. Essentially, the longevity annuity is a gamble on how long you might live, as it pays out only when you live into your 80′s and beyond. However, the pay out can be big if you live a long time, for a minimal investment you are guaranteed almost $2000 a month in payments.

What is a Longevity Annuity?

A longevity annuity is much like a regular annuity in that it is money that you invest now for a guaranteed pay out later. Longevity annuities generally have lower premiums then regular annuities, because there is a good chance that many people who purchase one won’t live long enough to cash in. This leaves money in the “pool” to allow for payment to those who do live to a very old age.

Annuities have often been compared to insurance in that the premiums are paid into a pool, and then divided up and paid out to those who need them. Some people never need the money so there is more for people who have multiple claims. With longevity annuities, they are more like fire insurance for your home. You don’t buy it with the hopes that your house burns down and you can cash in. You purchase it “in case” because you wouldn’t be able to afford to replace everything you lost. Longevity annuities are purchased “in case” you live to be 100 and have used up all of your regular retirement savings.

How Does it Work?

When a person purchases a longevity annuity they choose the terms that work best for them. Generally the minimum age for purchasing an longevity annuity is 40 and the maximum age is 83. Collection on the annuity can not begin until 13 months after the last premium is paid, or at the latest, age 85. With a relatively minimum payment, perhaps closer to about 10% of the person’s income, vs. the more typical 60% for a regular annuity, a person can expect a monthly payment of about $1800. The amount is slightly less for women and slightly more for men as they have a shorter life expectancy.

Deciding to Buy

Deciding to buy longevity insurance is really personal and should be based on a number of factors. Examine your retirement portfolio and determine if you have enough coverage to last you well into your late retirement years. Also, examine your own health and your family history. If you are relatively healthy, have a family history of living into old age, and if your retirement savings could use a boost, a longevity annuity might be the right choice for you.

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