Longevity Annuities Overview
An annuity is a contract between you and an
insurance company, under which you make a lump-sum payment or series of
payments. In return, the insurer agrees to make periodic payments to
you beginning immediately or at some future date. Annuities typically
offer tax-deferred growth of earnings and may include a death benefit
that will pay your beneficiary a guaranteed minimum amount, such as
your total purchase payments.
Longevity Annuities make periodic payments at a future date as opposed to immediate annuities. Often the period of time before the payments begin can be many years. The longer the period of time, the lower the premium will be at the time of purchase. A good strategy is to put money into the longevity annuity well before your retirement. If you fund it when you are in your forties, it will be significantly cheaper.
The typical purchaser of a long term annuity would place a small percentage of their assets in the annuity, typically 5 to 10%. The bulk of their portfolio would stay in other investments and provide income. When the longevity annuity payments begin, they augment your other sources of income.
A longevity annuity can be used to insure an income stream from your investments. For example a 55 year old can purchase a longevity annuity that will begin payments when the person reaches 75 years of age. During that 20 year period, inflation will erode the value of the income from the person's other investments, social security and pensions. When the longevity annuity payments begin, they will restore lost purchasing power. Since the person knows that the longevity annuity payments will begin at age 75, they can live off a higher percentage of their assets in the period of time between age 55 and 75.