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What is a Longevity Annuity?

Published on: Aug 05 2021
By Olivia Faucher

An annuity is a contract between an individual and an annuity provider. Under the contract, the individual makes an initial investment in return for the guarantee that the provider will make monthly payments to the investor in the future. There are various types of annuities. This article is going to focus on longevity annuities and their nuances. 

What is a Longevity Annuity? 

A Longevity Annuity is a specific type of annuity under which the annuitant commits money upfront in exchange for a future monthly payout that will continue for the rest of his or her life. 

Longevity annuities are purchased with a one-time lump-sum premium. The payouts are  (are or can be?) deferred, meaning they begin at some future date (at least 2 years) after the annuity is purchased. During the deferral period, the insurance company invests the initial investment money on behalf of the annuitant. The longer the annuitant chooses to delay his or her payouts, the greater the size of the payouts will be.

Longevity annuities are also commonly referred to as deferred income annuities or DIAs.

Payout Options that can be added to a Longevity Annuity: 

The owner of a longevity annuity can decide if he or she wants their payouts to depend solely on lifespan, or if the addition of a guaranteed component is ideal. The following are the payout options for a longevity annuity: 

  • Life Only: payments stop at death (or later of two deaths for a joint annuity), and the remaining assets in the account are surrendered to the financial institution that issued the annuity
  • Life with Refund at Death: additional guarantee on top of life only that pays beneficiaries the difference between the initial premium investment and the sum of all payments already received upon the annuitant’s death
  • Life with Period Certain: guaranteed to pay out for the remainder of the annuitant’s life, but also provide the additional security of adding a specified period during which his or her beneficiaries will receive the remaining payments if the annuitant passes away during the period. For example, if the annuitant buys a life and 10-year certain annuity and passes away during the third year of the period certain, their beneficiaries will receive their payments for the remaining seven years of the period. 

Example of a Longevity Annuity: 

Susan is a 52-year-old woman who is planning for her retirement. She decides to buy a longevity annuity to provide income when she runs out of income from her IRA. Susan buys the annuity with an initial investment of $100,000. She delays her payouts until she is 75 years old, and the annuity provider invests her principal investment during the deferral period. When Susan turns 75, she begins to receive her payouts of $986.79 per month. She receives her monthly payouts until she passes away, at which time the remaining assets in her annuity account are passed down to her daughter (her designated beneficiary). 

Pros of Buying a Longevity Annuity:

  • Spousal Benefits: Longevity annuities can be set up as joint annuities, meaning that the payouts will continue as long as either the annuitant or his or her spouse is still alive. This additional benefit ensures financial stability for both spouses. 
  • Peace of Mind: The owner of a longevity annuity can have the peace of mind that he or she will receive monthly income for the remainder of their life. The reliability of a longevity income allows investors to accurately plan the best way to utilize other spruces of retirement income. In fact, adding the security of a longevity annuity to a portfolio can enable an investor to be more ambitious with the rest of his or her portfolio. Investors can take more risks knowing they have the security of their annuity income.
  • Clear Product Structure: Relative to other types of annuities, longevity annuities have a simple structure. For any amount of principal that the annuitant wishes to invest in the annuity, the insurance company can tell him or her how much monthly income will be received. 

Cons of Owning a Longevity Annuity: 

  • Limited Liquidity and No Cash Value: Longevity annuities do not have a cash value that can be withdrawn or borrowed from in the event that the annuitant would like to have money back. Additionally, longevity annuities do not offer much liquidity. 
  • No Exposure to the Market: The income that an annuitant receives from a longevity annuity is set at a fixed amount, and does not depend on the performance of the market. This stipulation means that the annuitant does not receive the benefit of gaining the increased returns from the potential upside performance of the market. 

The Bottom Line

With so many annuity variations, it is crucial for potential investors to research the different types of annuities. Annuities offer the benefit of being highly customizable and can be modified to fit the needs of an individual investor. Investors should understand all the options that are available in order to make the best choice for their own situation. 

Special thanks in preparing this summary of “What is a Longevity Annuity?” goes to Bob Carlson, leader of the Retirement Watch advisory service and chairman of the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets.





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