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People are living longer and longer. With increased longevity comes a fear that retirement savings won't last. Annuities and long-term care insurance address some of this need, but there is still the possibility that if you live long enough, you will outlive your savings. To address this issue, insurance companies are offering a new product that provides a steady income stream in later years.
Longevity insurance allows an individual aged 55 or older to invest a lump sum and, in return, receive a guaranteed income starting at a specific age, typically age 85, that lasts for the rest of the individual's life. While similar to an annuity, longevity insurance typically has a bigger payout than an annuity. For example, a woman who invests $25,000 at age 65 would get $17,000 a year for life starting at age 85, while a man would get $23,300 a year.
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The downside is that basic longevity insurance policies do not have a death benefit or inflation adjustment and are not as flexible as annuities. Companies have just started offering these products, so they are still a work in progress. Some longevity insurance policies now have the option to purchase a death benefit or the flexibility to change the age at which you receive payments, but these features cost more. MetLife introduced "retirement income insurance" last year. Hartford Financial Services Group also has a longevity product, and New York Life is working on its own version.
The benefit of longevity insurance is that it allows you to spend down your savings, knowing that you will have an income stream in later years, which you can use for long-term care or other needs. However, the drawback to buying such a policy is that you may not live long enough to see any return on your investment. In addition, you may become sick and need the extra money before you turn 85. If you purchase longevity insurance, make sure you have enough money or other means to pay for any long-term care needs you may have before age 85.
For an article on longevity insurance from SmartMoney.com, click here.