Thanks to advances in medicine, Americans are living longer -- but finding a way to pay the bills when your working years are in the rearview mirror can be a challenge.
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The National Bureau of Economic Research Inc. says that longevity is expected to increase at the rate of one to two months per year for each age group currently 60 and over. People who are now 60 years old can expect to live more than a year longer than their older siblings who are 70. And nearly 82 percent of female non-smokers who turned 60 in 1996 will still be alive at age 80.
But having financial security, particularly after age 80, may be hard. The percentage of American workers with virtually no retirement savings has grown for the third straight year, and is now up to 43 percent, according to the Employee Benefit Research Institute's annual Retirement Confidence Survey.
Think you will live beyond age 85?
So how do you avoid outlasting your money? One solution is longevity insurance. This product kicks in at age 85. Your payout depends on the amount you've invested and the interest rate you receive.
But insurance is a bit of a misnomer for this product sold by insurer MetLife and, with some variations, by The Hartford and New York Life.
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"It's a deferred annuity," says MetLife's Bennett Kleinberg, a vice president and senior actuary. "The longer people live, the more they get."
How does it work? If a 55- to 65-year-old person bought this annuity from MetLife now for $50,000 or more, it would begin to pay off when they turn 85 and pay out every year until their death.
The insurance company's new clothing
Longevity insurance has come under a lot of criticism. It is essentially a single-premium annuity for senior citizens, or "an old product dressed in new clothing," says economist Steve Weisbart of the Insurance Information Institute (III).
There are two major concerns: inflation, which reduces the real value of your payouts, and interest rates.
"When putting money away in a single premium deferred annuity, the level of long-term interest rates is always critical," says James Hunt, who evaluates life insurance for the Consumer Federation of America. He says another investment might do better, but an insurance product does have the advantage of tax deferral.
Some financial planners believe that you should consider other products that do the same but remove the risk that you will die before you collect.
Wind at our backs
Howard Hagen, a New York City-based independent benefits consultant, says that longevity insurance doesn't always make sense. Hagen warns that "insurers have changed their mortality tables to lower payouts, so you don't get as big a bang for your buck. Investment markets have done better for those who have a large portfolio." And, if you don't have a lot of money, it's a difficult decision to put away $50,000 or more in an account you may never touch, adds Hagen.
MetLife's Kleinberg admits that although longevity insurance has been on the market for several years, sales have been "small for now." Still, he says that with current market volatility and the baby boomer generation looking at the prospect of outliving their money, "the wind is at our back."
Advantage: the insured
One advantage of purchasing longevity insurance is that, unlike some other life insurance policies, no medical exam or medical history is required. You can use longevity insurance as a hedge against traditional life insurance policies, which insure against dying earlier in life.
Another advantage is that those willing to face the reality of their potential demise now have an accurate DNA test, developed by Boston University scientists, that tells you if you have the potential to live a long life.
The test results show the markers for those who may win the "lottery of life," as Science Journal puts it, and could live to be 100. These people will need to put aside money for the longer term. Those who don't take a test can potentially beat the law of averages if they know their family health history. If your parents and grandparents lived long lives, then perhaps you too will "live long and prosper."