Taking Stock: Longevity in Longevity?

Dear Mr. Berko:
Please tell me about Longevity Insurance. How does it work, what are the costs and what are the advantages or disadvantages? And then please tell me if you think I should invest in this type of policy. I will be 65 next March (so will my wife) and my insurance agent wants me to invest in this new insurance policy that he says “protects us from living too long.”
C.D., Aurora, Ill.
Dear C.D.:
Longevity Insurance may be a supercalifragilistic concept that might protect you from running out of money in retirement years. It’s sort of like playing the lottery, but with two exceptions: (1) The ticket will cost a lot more than $1 or $5 and (2) you have to wait 20 years to collect your loot. All you have to do is hand over a bushel of cash to MetLife or Harford or New York Life, etc., around the time your retire (usually 64 to 66), and the insurer guarantees you a monthly payment beginning at age 85 for the rest of your life even if you live to be as old as Methuselah. 

Depending on your genetic configuration, this could be a smart move for you and lots of other folks. According to the Society of Actuaries, a healthy 65-year-old couple has a 51.3 percent degree of probability that they will live till age 92, providing they don’t take up skydiving or smoke pot. 

And even if you don’t live that long, it still makes good sense because it removes some of the uncertainty of how much of your retirement savings you can spend. Because you know that at age 85, your income will increase by $1,000 or $2,000 or 3,000 per month you can comfortably draw down a little extra from your IRA, 401(k) or savings. 

There are some drawbacks to consider. You may not live long enough to recover your initial premium; though some insurers, for a lot more premium, will allow your heirs to receive all of your money. 

Another caveat is inflation. A policy you buy now with today’s dollars will pay you today’s dollars 20 years from now. But for an additional premium, some insurers will provide a policy that pays in inflation-adjusted dollars. Those caveats aside, Longevity Insurance may be an attractive consideration for some folks. 

The lump sum payment to guarantee a 65-year-old male an income of $1,000 per month beginning at 85 is about $18,500. And the lump sum payment to guarantee a 65-year-old woman an income of $1,000 each month beginning at age 85, for the rest of her life, is around $23,000. The cost for a female is higher because females are cleaner, smarter, stronger, and they live longer than men. And if a 65-year-old husband and wife want to guarantee themselves an income of $1,000 per month each, the premium would come to about $33,000. 

Now, if you are a lady and pay the $23,000 premium at age 65, on your 85th birthday, the insurer will begin paying you $1,000 per month forever. Since you invested $23,000, you would get all your money back in 23 months, just one month before your 87th birthday. And in five more years, just one month before your 92nd birthday, you will have received a total of $83,000. And that sure beats a poke in the eye with a sharp stick.

However, I cannot tell you if this is something that you should own without having a very clear picture of so much about you. I suggest that you engage a fee-based financial planner to help you make a decision. And I’d certainly not ask your insurance agent if you should own this policy. That’s like asking a roofer if your house needs new shingles, or a car salesman if you should trade in your old model for a new one.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate Web site at www.creators.com.
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