One of the biggest concerns people face in retirement is the possibility of outliving their savings. That’s exactly the problem longevity annuities are designed to solve. Also known as Deferred Income Annuities (DIAs), these contracts provide a guaranteed stream of income that begins at a future date and continues for as long as you live.
What Makes Them “Longevity” Annuities
The term “longevity” comes from their purpose: protecting you against the financial risks of living a long life. Unlike other retirement products, annuities are the only contracts that can guarantee income for life. No matter how many years you live past your original expectations, the payments continue.
How They Provide Lifetime Income
Here’s the basic idea: you purchase a longevity annuity today, but you choose a date in the future—maybe seven, ten, or even twenty years later—when the payments will begin. The income you receive is based on your life expectancy (or you and your spouse’s joint life expectancy if it’s set up that way) at the time you start collecting.
It’s essentially a transfer of risk. You’re shifting the burden of making sure your money lasts to the insurance company, and in return, they commit to paying you for life.
Structuring the Contract
Longevity annuities can be customized. If you want, you can include a provision so that if you pass away before payments start, your beneficiaries receive the unused funds. This way, you don’t lose everything if life takes an unexpected turn before the income stream begins.
Principal and Interest
Payments from a longevity annuity are a mix of two components: your original investment (the principal) and interest credited by the insurer. Once your account value is technically “used up,” the insurance company continues sending checks. That’s the essence of lifetime protection—your payments don’t stop, even if your personal balance reaches zero.
Comparing Longevity Annuities to Social Security
If this sounds familiar, it’s because Social Security works in a very similar way. By delaying your Social Security benefits, you receive larger monthly payments later in life. A longevity annuity operates on the same principle: the longer you wait to start, the higher the payout, since your expected number of payments is fewer.
Key Takeaways
Longevity annuities are straightforward contracts with no hidden fees or market-based risks. The amount you receive is primarily determined by your age and life expectancy when you begin income, with interest rates playing a smaller role.
If your goal is to create guaranteed income later in life, these annuities can be an effective tool. They’re simple to understand, easy to structure around your needs, and most importantly, they give you peace of mind that you won’t run out of money no matter how long you live.
