PROTECTING Your Retirement Income
Most people are familiar with long-term care, life, and disability insurance as ways to protect retirement income, however, this isn't the case when it comes to longevity insurance. Before we discuss this relatively new retirement income protection strategy, let's take a look at the reason it's becoming more and more popular.
People Underestimate How Long They Will Live
It's been our experience at Retirement Income Center that our clients generally underestimate how long they will live. A typical response when we pose this question to clients is, "My mom died when she was 78, maybe I'll make it to age 80."
Not only is it common for people to live to age 80, it isn't unusual to survive to age 90 and even to 100. According to a March, 2012 report, The 2011 Risks and Process of Retirement Survey, prepared for the Society of Actuaries, when a couple reaches 65, there's a 10% chance that at least one of the individuals will live to 100. There's a 1% chance that one spouse will reach 107.
In addition to basing life expectancy assumptions on how long parents survived, people also underestimate their life expectancy because the numbers have been changing quickly. For newborn American males, life expectancy has been increasing by two years every decade, from 66.6 years in 1960 to 75.7 years by 2010 according to the Society of Actuaries. For females, the average increase was 1.5 years per decade, from 73.1 years in 1960 to 80.8 years by 2010.
We've also observed that even when people are apprised of statistical life expectancies, they forget that the ages represent median life expectancies and half of the people will live longer.
Our experience with underestimation of life expectancy at Retirement Income Center isn't unusual. Per the press release regarding the Society of Actuaries report, more than half of retirees and pre-retirees underestimate the age to which a person of his or her age and gender can expect to live.
Per the press release, despite the fact that they generally underestimate their life expectancy, "...most retirees (64%) and pre-retirees (72%) say they would be very or somewhat likely to reduce their expenditures signficantly if they were to live five years longer than expected. "
Given the foregoing findings, while we seek, value, and encourage our clients to share with us any information that may affect their retirement income planning, we're professionally skeptical when it comes to life expectancy. Because of the serious financial ramifications associated with underestimating life expectancy, we spend a fair amount of time educating clients about this important subject.
Enter Longevity Insurance
Longevity insurance is the popular term applied to the use of a fixed income annuity strategy, the deferred income annuity, or "DIA," that's also discussed in the Immediate and Deferred Income Portfolio Strategies section, for longevity purposes. DIA's are currently offered by only a handful of life insurance companies.
Like single premium immediate annuities, or "SPIA's," DIA's pay periodic income for a specified period of time or over one's lifetime or joint lifetimes as applicable. Unlike SPIA's that begin payments one month after date of purchase, the start date of payments for DIA's is deferred for at least 13 months from the date of investment. The longer the income start date is deferred, the lower the premium, or investment, required.
When used as longevity insurance, the payout on DIA's typically starts in one's 80's and is for life. Depending upon the age at which a DIA is purchased, the premium can be a relatively small amount compared to the potential lifetime income that may be received.
A DIA can be purchased with a death benefit that will typically return 100% of the original investment in the event of premature death prior to the income start date. The income from DIA's purchased with a death benefit will generally be less than those without a death benefit.
At Retirement Income Center, we recommend DIA's as a longevity insurance strategy when appropriate. Fixed index annuities, or "FIA's," with income riders can often be used in lieu of, or in conjunction with, DIA's as a retirement income protection strategy.
See Robert Klein's article, Longevity Insurance: Annuities for the Long Haul, that was published in The Wall Street Journal on May 29, 2013.