Longevity Annuity

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on May 23, 2023

Get Any Financial Question Answered

Definition and Importance of Longevity Annuity

A longevity annuity is a financial product designed to provide a guaranteed income stream for life, beginning at a predetermined age, typically in the later years of retirement. These annuities are specifically designed to help retirees manage the risk of outliving their savings.

With increased life expectancies and uncertainty surrounding retirement income sources, longevity annuities are becoming an essential part of retirement planning. They offer a level of financial security by providing a steady income stream, irrespective of market fluctuations.

Types of Longevity Annuities

There are several type of longevity annuities, including the following:

Deferred Income Annuities (DIAs)

Deferred Income Annuities (DIAs) allow the investor to make a lump sum payment or a series of payments to an insurance company, with the promise of receiving guaranteed lifetime income at a later date, typically in retirement.

Qualified Longevity Annuity Contracts (QLACs)

Qualified Longevity Annuity Contracts (QLACs) are a specific type of DIA, designed for use within qualified retirement plans, such as IRAs or 401(k)s.

They offer tax advantages by allowing the investor to defer a portion of their Required Minimum Distributions (RMDs) until the annuity payments begin.

Variable Annuities With Living Benefits

Variable annuities offer the potential for investment growth based on the performance of underlying investment options, such as stocks and bonds. The living benefit rider provides a guaranteed lifetime income stream, regardless of the investment performance.

Fixed Index Annuities With Lifetime Income Riders

Fixed index annuities offer interest crediting based on the performance of a market index, such as the S&P 500. The lifetime income rider guarantees a lifetime income stream, regardless of market fluctuations.

Types of Longevity Annuities

Benefits of Longevity Annuities

Longevity annuities have several advantages, such as:

Guaranteed Lifetime Income

Longevity annuities offer a guaranteed income stream for life, providing financial security and peace of mind throughout retirement.

Protection Against Outliving Savings

By providing a stable income source, longevity annuities help retirees manage the risk of outliving their savings.

Potential for Higher Payouts Than Traditional Investments

Longevity annuities often provide higher payouts compared to other fixed-income investments, such as bonds or CDs, due to their lifetime income guarantees.

Tax Advantages

Certain types of longevity annuities, like QLACs, offer tax advantages by allowing investors to defer RMDs and reduce their taxable income.

Inflation Protection

Some longevity annuities offer optional riders to help protect against inflation, ensuring that the income stream maintains its purchasing power over time.

Benefits of Longevity Annuities

Factors to Consider Before Purchasing a Longevity Annuity

There are several factors which one must consider before investing in a longevity annuity.

Financial Goals and Retirement Needs

It is crucial to evaluate your financial goals, retirement needs, and current savings before purchasing a longevity annuity.

Life Expectancy and Health Status

Consider your life expectancy and overall health when determining if a longevity annuity is suitable for your financial plan.

Inflation and Interest Rate Risks

Inflation and interest rate fluctuations can impact the purchasing power and value of annuity payments, so it is essential to understand these risks before investing.

Annuity Fees and Expenses

Annuities often come with various fees and expenses, which can impact the overall return on investment.

Liquidity and Flexibility Concerns

Longevity annuities typically have limited liquidity and flexibility, making it crucial to understand the surrender charges and restrictions before purchasing.

How to Choose the Right Longevity Annuity

The following are the steps involved in choosing the right longevity annuity.

Analyzing Personal Financial Situation and Goals

Before choosing a longevity annuity, it is essential to assess your financial situation, retirement goals, and risk tolerance to ensure the annuity aligns with your overall plan.

Comparing Different Annuity Products and Features

Research and compare various annuity products, features, and riders to determine which option best suits your needs.

Evaluating Insurance Companies and Their Financial Strength

Choose an insurance company with a strong financial rating and a positive reputation to ensure the safety and stability of your investment.

Consulting With an Insurance Broker or Retirement Expert

Consult with an insurance broker or retirement expert to help guide your decision-making process and ensure you choose the right longevity annuity for your situation.

How to Choose the Right Longevity Annuity

Longevity Annuity Regulation and Consumer Protection

Role of State Insurance Departments

State insurance departments regulate the sale of annuities and enforce consumer protection laws to ensure fair practices within the industry.

Guaranty Associations and Their Coverage Limits

State guaranty associations provide coverage for annuity contracts in the event of an insurance company's insolvency, but coverage limits vary by state, making it essential to understand your protection level.

Relevant Federal Regulations and Protections

Federal regulations, such as the Employee Retirement Income Security Act (ERISA) and the Dodd-Frank Wall Street Reform and Consumer Protection Act, help protect consumers and provide guidelines for the annuity industry.

Case Studies

Success Stories of Retirees Using Longevity Annuities

Several case studies demonstrate the positive impact of longevity annuities on retirees' financial security and quality of life.

Challenges Faced by Those Without a Longevity Annuity in Retirement

Retirees who have not included a longevity annuity in their retirement plans may face financial challenges and stress due to uncertainty about their income sources.

Lessons Learned from Real-Life Experiences

Real-life experiences offer valuable insights into the benefits and potential pitfalls of longevity annuities, helping future retirees make informed decisions.

The Bottom Line

Longevity annuities are a vital component of retirement planning, offering guaranteed lifetime income, protection against outliving savings, and the potential for higher payouts compared to traditional investments.

Various types of longevity annuities, such as DIAs, QLACs, and annuities with living benefits, cater to different needs and preferences.

Before purchasing a longevity annuity, it is crucial to consider factors like financial goals, life expectancy, inflation and interest rate risks, fees and expenses, and liquidity concerns.

Choosing the right longevity annuity involves analyzing one's financial situation, comparing products and features, evaluating insurance companies, and consulting with financial advisors or retirement experts.

Given the complexity and long-term implications of purchasing a longevity annuity, it is highly recommended to seek the guidance of a professional insurance broker.

Longevity Annuity FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

Use Our Broker Locator to Find Brokers in Your Area

Find Advisor Near You