Longevity Policies, A Better Alternative To Annuities?

A longevity policy is similar to an income annuity; however, it does not allow the beneficiary of the policy to take an immediate stream of income. There may be many benefits to this type of policy. For example, while a beneficiary cannot take a benefit from the policy immediately, the amount that a beneficiary will receive is greater than what they would receive in an annuity.

The policy acts like a safety net for a beneficiary later in life. It could give the beneficiary the ability to withdraw more of their savings account without having to worry about the availability of funds, or it could provide a more reliable source of income for those who would not be able to pay for medical insurance or other similar expenses. The policies are quickly becoming an acceptable substitute to pensions, but these policies are not without fault.

These policies are just like annuities and have most of the same faults. If you were to die before you could enjoy your benefits, the principal you paid to the company would be lost. Additionally, while the stock market is unstable at the moment, a person could stand to make more money if that individual chooses to invest in the stock market and bonds. Furthermore, inflation could affect the purchasing power of the payments that a beneficiary would receive from the annuity. A policyholder could prevent these problems by opting into a program that allows that person to raise their annual payments; however, these provisions often require the policy holder to pay a higher premium or begin at a lower starting amount.

Advisors suggest that policyholders purchase plans with a “laddering” technique, which allows the payments to be spread in such a way as to change with inflation. There is also an age requirement if a policyholder purchases this policy with funds from their 401(k). The IRS requires that the policyholder start the stream of income at age 70.5 if he or she has a tax-deferred account. Be careful when selecting a policy carrier, and know that  industry-backed guaranty associations in each state provide some protection in the event that your insurer becomes insolvent. 

See Anne Tergensen, How To Create A Pension (With a Few Catches), The Wall Street Journal, Apr. 9, 2012. 

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.