Planning on a Long Life with Longevity Insurance

One evening, years ago, I was fiddling around with a life expectancy calculator online and after running the numbers on myself, I decided to run through the program for my wife.

Her problem was very different than mine (I’m on borrowed time already). According to this calculator, her life expectancy was 116!

It made sense, there is a lot of longevity in her family and she doesn’t chain smoke or drink regularly like a few of her elders. She’s very fit and medicine is a lot better today.

At first, she was pretty excited because she has so much time left (and a good deal of it without me, which will be a real benefit).

But then she realized that it’s going to be an expensive proposition. If I stop working at 67, full retirement age for Social Security (assuming no changes), and assuming we’re the same age, that’s 49 years of retirement. I say again, that’s 49 years of retirement.

Of course, she could live longer than her life expectancy. A life expectancy estimate isn’t the age that you’re expected to die, it’s a probably estimate. Half the people with your circumstances (heredity, physical condition, gender, etc.) will die before their life expectancy and half will live longer.

This presents a bit of a challenge in the financial planning process. Our model, the Acropolis Financial Forecaster, or AFF, does a ‘stress test’ to see if your financial assets will last through your age 100, which is usually about 16 years longer than someone’s life expectancy. My wife’s life expectancy is 16 years longer than our stress test.

I haven’t really done much about this from a planning perspective, other than assume that I’ll work until they cart me out in a pine box, but recently, I’ve been reading about ‘longevity insurance.’

In a way, longevity insurance is the opposite of term insurance – something that I believe in and own for my family and me. With term insurance, I pay premiums each year for a set number of years and, if I die, then my wife gets the proceeds. If I live, I’m out the premiums, but I’m still really happy.

With longevity insurance, you make premium payments, but instead of a payment upon death, you get a stream of income starting when you turn 85. If you don’t live to age 85, the insurance company keeps the money, but what do you care at that point?

Believe it or not, you can purchase longevity insurance as early as age 21, and while I haven’t checked any quotes, I’m betting it’s pretty cheap. The examples I’ve seen for 65 year olds look fairly reasonable.

On the other hand, you’re making a big bet about the solvency of the insurance company that you buy from. It may be rated AAA today, but what will it be in 75 years (or longer)? I’m not even sure about the Federal Government having money for our Social Security (if you’re over 45, don’t worry) and it has taxing authority.

At this point, I can’t say that I am really considering it for us or for anyone else. I do think it’s a very interesting product for a vexing problem, but it’s so new that I wouldn’t commit to anything yet.

It’s funny because my wife doesn’t like talking about insurance since it deals with death or disability. I thought longevity insurance would go over better since it’s about living, but it didn’t go over any better for some reason.