Understanding Longevity Insurance
What is Longevity Insurance?
Longevity insurance is an innovative financial product designed to provide you with income during the later stages of life, typically starting at an advanced age, like 80 or 85. This type of annuity helps mitigate the risk of outliving your savings, ensuring you have a steady income stream when you need it most.
Qualified Longevity Annuity Contract (QLAC)
The type of longevity annuity used for qualified retirement accounts (401(k), IRA, 403(b), 457, TSP) is called a Qualified Longevity Annuity Contract (QLAC). A QLAC is an insurance policy that allows you to set aside money for retirement to delay RMDs while still receiving the benefits of tax-deferred growth. The money in your QLAC can then be used to purchase an annuity that will provide you with income for life.
How Does Longevity Insurance Work?
- Initial Investment: You make a one-time payment to an insurance company, often when you’re in your 50s or 60s.
- Deferred Payouts: The insurance company agrees to start paying you a regular income at a specified future age, for example, 85.
- Lifetime Income: Once the payouts begin, they continue for the rest of your life, providing a steady income stream in your advanced years.
Examples of Longevity Insurance Benefits
- Example 1: A 60-year-old invests $100,000 in longevity insurance. At age 85, they start receiving $1,000 per month for life.
- Example 2: A 65-year-old invests $50,000. If they live to 80, they will receive $500 monthly thereafter.
Why Buy Longevity Insurance?
1. Income Starts When You Need It Most
By deferring income to a later age, you preserve more of your assets early in retirement while creating a future income stream that kicks in when other funds might be depleted.
2. Higher Income Payouts
Because payments are delayed, insurers can offer much higher income payouts than with annuities that start immediately. This allows you to generate more lifetime income per dollar invested.
3. Reduces RMD Impact When Used as a QLAC
When funded with qualified retirement accounts (IRAs, 401(k)s), longevity insurance can be designated as a Qualified Longevity Annuity Contract (QLAC). This delays Required Minimum Distributions (RMDs) on that amount until income begins, reducing taxable income in your 70s.
Who Needs Longevity Insurance—and Who Doesn’t?
You Need It If You:
- Are age 55–70 and healthy with family longevity
- Want income later in life to complement other income sources like Social Security
- Need to reduce future RMDs and income taxes in your early 70s
- Prefer guaranteed income without ongoing market risk
You Don’t Need It If You:
- Have a shortened life expectancy due to health conditions
- Need access to your money or flexibility in timing
- Can’t afford to lock away a lump sum with no early liquidity
- Want your money to grow through market exposure or offer earlier income options
How Longevity Insurance Works
- You fund it with a lump sum, typically from savings, a rollover IRA, or a qualified retirement plan
- You select a future income start date, often between the ages of 80–85
- Payments begin at the selected age and continue for the rest of your life
- Optional enhanced death benefits can return unused premiums to your beneficiaries if you die before or shortly after payments begin
- When funded with qualified dollars, it can be classified as a QLAC, subject to IRS contribution limits
Acceptable funding sources include:
- Traditional IRA
- 401(k) or 403(b)
- Rollover IRA
- Non-qualified savings
- Not typically suitable for Roth IRAs (already tax-free)
Pros and Cons of Longevity Insurance
| Pros | Cons |
|---|---|
| Guarantees lifetime income at older ages | No liquidity—funds are locked in once purchased |
| High income payout for the premium invested | You may die before receiving payments without enhanced death rider |
| Helps offset the risk of living too long | Doesn’t provide inflation protection unless added as a rider |
| Can be used as a QLAC to delay RMDs | Not ideal for short- or medium-term income needs |
Alternatives to Longevity Insurance That May Offer More Flexibility
Fixed Indexed Annuity (FIA) With Guaranteed Lifetime Withdrawal Benefit (GLWB)
FIAs offer index-linked growth based on a benchmark (like the S&P 500) or a declared fixed interest rate, combined with the option to add a GLWB rider that guarantees income for life. Unlike longevity insurance, FIAs:
- Allow income to begin sooner, often within 10 years or less
- Include annual penalty-free withdrawals, even during the surrender period
- Offer optional enhanced death benefits that pay your full account value or protected income base to beneficiaries
- Provide market-linked growth with zero downside risk
This is ideal for clients who want flexibility, earlier income access, and growth potential—and still want to avoid annuitization.
Deferred Income Annuity (DIA) With Enhanced Death Benefits or Joint Life
This is essentially a broader version of longevity insurance with more customizable options:
- Allows for earlier income start dates (e.g., starting 2–10 years from purchase)
- Can be structured with joint income for spouses
- Return-of-premium riders protect your principal if you die before payouts
- Optional cost-of-living adjustments (COLAs) help combat inflation
DIA contracts offer more flexibility than strict longevity annuities and may be more appropriate for retirees who want delayed income but not necessarily starting at age 85.
Single Premium Immediate Annuity (SPIA)
While not a substitute for longevity insurance, SPIAs are ideal for those who:
- Need income to begin immediately
- Want a guaranteed payout for life or a fixed period
- Are ineligible for deferred products due to age or health
However, SPIAs come with drawbacks:
- Income is fixed—no growth potential
- No liquidity once income begins
- Offers limited death benefits, unless you choose a period certain option
- Less flexible than FIAs with GLWBs
SPIAs are sometimes used in Medicaid planning or for early retirees who need non-qualified income prior to age 59½ without penalties, especially when paired with life insurance to recover the principal.
Permanent Life Insurance
Life insurance can offset one of longevity insurance’s biggest drawbacks—what happens if you die early. A properly designed permanent policy:
- Creates an immediate estate for your heirs
- Can be structured to pass tax-free death benefits
- Acts as a risk transfer tool to protect your legacy if your annuity never pays out
- May also accumulate cash value that can be accessed in retirement
This strategy is especially useful when using longevity insurance or SPIAs with no refund provisions.
Long-Term Care Annuities
- If you’re concerned about healthcare costs late in life, a standalone long-term care annuity may be a better complement to longevity insurance:
- More efficient than LTC riders on FIAs, which often just return your own money
- Doubles or triples income payments for qualified long-term care expenses
- Preserves unused principal if care isn’t needed
Annuities Provide More Security Than Investment Projections
Monte Carlo simulations only provide probability estimates—they don’t guarantee anything. Annuities remove that uncertainty. With longevity insurance or an FIA with a GLWB, the insurance company absorbs the investment and longevity risk, ensuring you get paid for life even if your investments run out or markets crash.
Final Thoughts: You Need More Than One Tool
Longevity insurance is one part of a complete retirement income plan. It can serve as a backstop for your later years, but it should be paired with other annuities for earlier income and liquidity. FIAs with GLWBs, permanent life insurance, and long-term care annuities offer critical flexibility that longevity annuities lack.
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Questions From Our Readers
How much does longevity insurance cost?
For a longevity annuity, the useful price is the premium required to buy a chosen monthly income starting at a chosen age. Compare quotes with the same start date, single- or joint-life coverage, and refund or survivor option. Starting payments later or choosing fewer survivor benefits generally changes how much income the same premium can buy, so compare the complete benefit rather than a standalone price.
Who has the best longevity insurance?
The best longevity insurance company will depend on your individual needs and circumstances. However, AIG is one of the top companies for longevity insurance.
What is the best way to get longevity insurance?
The best way to get longevity insurance is to contact an independent insurance agent or broker (like The Annuity Expert) and ask about QLACs. You can also find many companies that offer this type of insurance online.
When should I buy longevity insurance?
The best time to buy longevity insurance is before you retire. The older you are, the higher your premiums will be. However, you can still purchase a policy even if you are already retired.
Should an annuity be part of my retirement plans, as longevity insurance, given that many family members lived into their 90s?
Yes—if your family history includes multiple relatives living well into their 90s, planning for a 30- to 40-year retirement is realistic. Annuities with guaranteed lifetime income, especially those using a GLWB (Guaranteed Lifetime Withdrawal Benefit), are designed exactly for this purpose—to provide income you can’t outlive.
This matters because most retirement plans (like 401(k)s and IRAs) are based on average life expectancy. But if you live to 95 or 100, your savings could be at risk of depletion in your later years, even if you follow a conservative withdrawal plan. Market downturns, inflation, or unexpected healthcare costs only increase that risk.
A fixed indexed annuity (FIA) with a GLWB locks in a lifetime income stream that won’t shrink—even if the market drops or your account value goes to zero. The income can start at retirement and continue no matter how long you live, making it one of the only financial tools that directly solves longevity risk.
If you’re planning to retire in the next 10–18 years , purchasing a GLWB annuity now lets you lock in future income at today’s rates and age-based payout factors. The earlier you prepare, the more income security you can build into your retirement plan.
For someone with strong longevity genes, a GLWB provides peace of mind that Social Security alone might not cover, especially if you’re single or don’t have a pension. Without it, you’re forced to guess your lifespan—and that’s a risk you don’t want to get wrong.
What is longevity reinsurance
Reinsurance that protects insurers/pension plans against the risk of policyholders living longer than expected.