What is Longevity Insurance?

Joseph Meyer
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What is Longevity Insurance?

Are you worried that your pension could run out before you die? Longevity insurance is just the solution you’re looking for. It offers affordable peace of mind that means you can live comfortably for longer.

How Using Longevity Insurance Saves You Money

You don’t need a large pension to start using longevity insurance. If you’re worried you might run out of money before you die, then it’s the less risky solution. That’s because you can claim back your cash, and if you live longer than you’ve planned then you keep the cash.

How Using Longevity Insurance Helps You

The good news is that 70% of all pension assets are derived from longevity insurance. This means it’s one of the best ways to ensure your pension will last. Unlike most other forms of life insurance, which are based on your risk, longevity insurance is a policy that you can use again and again by canceling and refilling it as your needs change. That means you can buy a policy that fits your budget.

How does Longevity Insurance Compare to Life Insurance?

In standard life insurance policies, premiums are guaranteed to be fixed for the life of the contract, with premiums adjusted periodically to account for the insured's age and other factors. Longevity insurance on the other hand, allows the insured to purchase a lifetime insurance policy with a premium that's fixed for the term. However, the interest rate, which is applied to the premium to determine the periodic payments, is variable. The insurance company guarantees that the cost of the policy will not exceed a certain amount.

The name longevity insurance is a bit of a misnomer. The policy term doesn't necessarily have to coincide with a person's retirement age, but the insurer will likely take a person's retirement age into account when calculating the premium. Longevity insurance is most frequently purchased simply because the premiums are lower than those on traditional life insurance policies. However, the decision to use longevity insurance to provide for one's future family is a complex one and shouldn't be made without careful consideration.

How Do I Set Up a Plan?

Longevity insurance, also known as life settlement insurance, is an agreement between a life insurance policy owner and an insurer that enables the owner to sell the policy to a third party at a higher price than the face value of the policy. The settlement prices increase as the insured’s life insurance policy nears its maturity date. Taking out a life insurance policy means paying an initial amount to the insurer, which is generally proportionate to one’s annual income. This initial investment is the basic cost of the policy. Once the insured is no longer bound by the terms and conditions of the plan, he can either replace the insurance, or just drop it altogether. In this case, the insured takes out another insurance policy to replace the expired one. Longevity insurance is not a maturity insurance plan. If the insured hasn’t met the policy's set requirements, the policy owner is obviously not entitled to a refund.

How does longevity insurance work?

It’s a straightforward procedure. The owner of a life insurance policy with a future maturity date transfers the policy to a third party to settle it earlier. This is referred to as terminating the policy. The future cash value of the remaining insurance is settled by the second party to secure it. Once a policy has been terminated, it is taken over by the policy owner.

Let’s look at an example.

Other Features

Longevity insurance is fixed annuity term insurance, and this term insurance can include a money back guarantee.

The money back guarantee is optional, and there are three different forms of this guarantee. The most popular one is known as a certain type. This guarantee means that the insurance company will pay you back the premiums paid on the policy if you die before getting the money back guarantee. If you die in the policy term, then your heirs will get the maximum guaranteed amount instead of the original premiums that you’ve paid. If the guaranteed amount is lower than the premiums you’ve paid, the difference is paid out as capital gains.

Money back guarantees can differ in the maximum amount that will be paid out. For example, some policies pay higher amounts to early survivors, but others will pay the same amount to everyone.

Another option is the non-participating guarantee. This is almost the same as the certain type, but the insurance company will not pay back the original premiums paid. Instead, they will simply give you a payout of the maximum guaranteed amount. The insurance company will not pay you any returns for the premiums but will also not charge you any mortality or expense fees.

What are the Advantages of Longevity Insurance?

Many people live their entire lives and then die with a lot of wealth on their person. For some of these people, their wealth is huge or even massive. However, as is often the case, these people have left no instructions for how to handle their wealth after they’ve gone.

The result of this is that much of the wealth they’ve accumulated will be added to the state coffers, be divided up among their closest relatives and friends, be given to charities, be given to people of their choice, or be used in some other way.

Because the state has no personal connection with the person who has died, they do not recognize any family and friends connections either. So, when the will is settled, the state does not acknowledge anything that casts doubt on its share.

What are the Disadvantages of Longevity Insurance?

Although longevity insurance is a smart idea, it’s not always the best option if you’re on a budget. For many people, the ongoing costs of the policy – such as the premium – can make upgrading to a better plan difficult.

Most longevity insurance policies carry a near term death benefit (your beneficiaries are paid right away if you pass away) and a long term death benefit (your beneficiaries need to wait to collect part of the value of the policy).

The first disadvantage is that the continuing costs could make it a difficult decision whether to upgrade to a better plan. You may decide to hold onto the policy, not upgrade and have the payments deducted from your investment portfolio. That reduces your net worth and can have an adverse affect on your heirs.

If you do upgrade and decide to use the premium payment to make extra contributions to your retirement accounts, then you may be in for a shock. When you take money from your retirement accounts, the penalties are fairly high. You could reduce some of that penalty by funding your IRA with a Health Savings Account or a Retirement Account if you have the funds for that. Then, take the money out of the HSA or Traditional IRA much later. If the money never comes out of your retirement accounts, you won’t have to pay the penalty.


Of Ordinary Life insurance policies for Retirement Planning:

While it is true that there are no ordinary days in retirement, there is not much difference between the types of Death Benefit or Term Assurance that the retirement planning insurance policy holder is likely to need, as for an insurance holder in the age 23-60 years bracket. Hence, planning for retirement and at the same time, standing to receive regular income need not go en-route.

People generally invest in insurance cover under education planning, marriage planning and insurance cover for retirement planning might lead to confusion. Often, the age of the parents, instead of the age of the child, is taken into account while buying a policy. This decision, thus, will lead to lesser protection, which subsequently might require the parents to rely on support from their children in the helping them during their last days on earth. This might strain the relationship between the parents and children.

However, there is a new type of insurance available in the market, which helps the retirees protect themselves against contingencies like these. This type of insurance, which can be called longevity insurance, makes it easy for the retirees to ensure that they live a financially secure and independent life. Typical features of a longevity insurance policy include death benefits, guaranteed cash flow option and, a fixed premium on the death benefit, subject to a maximum guarantee.