Why is longevity insurance different from the rest of the annuity market?

Longevity insurance is the most efficient and cost-effective way to pool longevity risk. The product offers guaranteed lifetime income payments which reduce your risk of outliving your retirement savings.

What exactly does that mean? Let’s break it down.

Pooling Longevity Risk

Insurance companies are in the business of pooling risk. What does this mean? Let’s look at it on the individual level. The risk that your house is lost in fire is something that people buy insurance against all the time. The severity of this loss would be significant to you, but the likelihood is relatively low. Insurance companies can collect premiums from you and all your neighbors such that if one of your houses suffers a loss in a fire, there is a pool of money to pay for the damages.

The same principle applies to longevity risk. Longevity risk is a little counter-intuitive — isn’t living a long life a good thing? Of course! But it’s also something you need to be prepared for financially. Insurers do this for you so that you don’t have to worry about exactly how much you can safely spend in retirement.

Guaranteed Lifetime Income Payments

The pooling of mortality risk enables the insurance company to offer a product that has a higher expected return than a bond for those who live well into retirement (beyond the average life expectancy). Income payments are set at purchase and never change, no matter what happens in the market or how long people live relative to their predictions. Payments are guaranteed by the insurance company’s general account (but subject to its claims-paying ability, so always look and understand credit ratings) and continue as long as you’re alive (or you and your spouse are alive, in the case of a joint product).

Reduce Risk of Outliving Your Retirement Savings

With the lifetime payments that come from the insurance company, you lock in a higher (often much higher) standard of living than if you had to rely solely on Social Security because you ran out of money.

info icon

Head to the DIA Guide to learn more about longevity insurance, how it works, and whether it makes sense for your retirement.