Planning for a Long Life: Longevity Insurance and Deferred Annuities
March 10, 2012 by William H. Byrnes, Esq., Robert Bloink, Esq., LL.M.
By William H. Byrnes, Esq., Robert Bloink, Esq., LL.M.
February 29, 2012 •
The Treasury Department recently proposed rules that would encourage individuals approaching retirement to use a new type of planning tool–longevity insurance–to fund increasingly longer retirements. These proposed rules recognize that traditional products are insufficient when your clients are living well into their 80s and 90s, and offer tax incentives to motivate the workforce to defer a portion of their savings until they reach old age.
Using longevity insurance, a type of annuity that defers payouts for an extended period (e.g., 20 years), allows retirees to bypass the typical minimum distribution requirements in certain circumstances. By offering this benefit, the government is recognizing that the days of relying solely on pensions and traditional 401(k)s to fund retirement are over, and that it’s time for retirees to begin planning to enjoy significantly longer lives.
Longevity Insurance Basics
Longevity insurance is purchased before retirement, but the benefits don’t begin until the client reaches old age–typically between 80 and 85. The client purchases the annuity at or around retirement age for a lump sum and can choose the date when payouts will begin.
The Treasury Department’s proposal encourages retirees to purchase longevity insurance using 401(k) or IRA funds. The proposal would exempt the retiree from minimum distribution requirements typically required of retirement accounts once a person reaches age 70-and-a-half, as long as the annuity costs less than 25 percent of the account balance, or $100,000, whichever is less.
Deferred annuities are also typically much less expensive than traditional annuities. For example, according to the president’s Council of Economic Advisors, it would cost a 65-year-old man $277,500 to purchase a traditional annuity that would begin payments of $20,000 per year immediately; it would cost only $35,200 if the payments were deferred for 20 years.
The cost also decreases when the client purchases the product earlier in life, according to MetLife, a primary provider of longevity insurance. At 85, your client can begin receiving payouts of $50,810 per year if he invests $50,000 at age 55, but the same initial investment provides annual payouts of $28,600 if he waits until he is 65 to invest. Payouts for women are slightly lower because of their higher life expectancies.
This type of advance planning allows your client to enjoy retirement (and their retirement portfolios) with the knowledge that they have another source of income that will kick in once their traditional funds have dried up.
Limitations on Longevity Insurance
Despite the benefits of planning through longevity insurance, this type of planning is not for everyone. Many clients may be wary of an arrangement in which they give up control of a portion of their retirement savings–once the funds are invested in the annuity, your client loses access until payouts begin. There is, after all, no guarantee that they will live long enough to need income this late in life.
Further, there is no guarantee that an annuity insurer will remain financially stable for 20 years and beyond, and these insurers are not currently covered by the same federal insurance that protects bank accounts. Clients who were burned in the economic downturn of 2008 and 2009 may be unwilling to risk investing their limited retirement savings with an institution that could disappear when those savings are needed the most.
Conclusion
Investing in longevity insurance may be a great way to ensure peace of mind for your clients as they near retirement. Safeguarding the ability to enjoy a long retirement without relying on children or government assistance may be a primary concern for many clients. While cost savings compared to traditional annuities may encourage this type of planning, however, many may be unwilling to risk losing control of these funds early in retirement. Despite this, longevity insurance can provide a useful option for
those retirees concerned with planning far into their future.
