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The Pros and Cons of a Longevity Annuity

Jan 18, 2023

Blueprint Income Team

Longevity annuities have several financial benefits to help make retirement planning simpler, but also have some drawbacks. Find out what a longevity annuity has to offer before you purchase.

  • Our list of pros and cons of a longevity annuity
  • Guarantee income in retirement 2+ years after purchasing
  • You can choose features and options to customize a longevity annuity that fits your needs
  • Knowing that you’ll have a guaranteed income stream allows you to have a riskier portfolio

Figuring out how long your retirement savings need to last is difficult. Guaranteed retirement income and a paycheck you won’t outlive sounds like a dream, right? Well you can purchase a longevity annuity (otherwise known as a deferred income annuity or DIA), which provides exactly that! Buying a longevity annuity with your pre-tax or post-tax retirement savings has a number of benefits, but also some drawbacks. We cover the pros and cons of a longevity annuity below:

By buying, you’ll know you won’t outlive your savings. 

Insurance is typically thought of as something you buy to protect you and your family from unfortunate events. A longevity annuity offers a more pleasant kind of protection though: longevity insurance, meaning it protects you from outliving your savings. The longer you live, the more financial value a longevity annuity provides.

To illustrate how a longevity annuity offers longevity protection and fixes your investment horizon, let's use Alan as an example. Alan is 50 years old and plans to retire at 70, at which point he'd like to have $87,000 to spend each year. But without knowing how long he'll live, Alan doesn't know how much more he needs to save. He's considering buying a longevity annuity to simplify his retirement planning and to ensure his financial stability for as long as he's alive.

With $100,000 of his savings, Alan can buy a longevity annuity that will cover his annual expenses starting at age 85 and continuing for the rest of his life. Knowing that he'll be set at age 85 regardless of his lifespan, Alan can more comfortably save for retirement. Assuming his IRA will earn a 5% return and ignoring inflation for simplicity, Alan needs to accumulate $950,000 by age 70. At that point, he'll be able to retire and withdrawal $87,000 from his IRA every year until age 85 when his longevity annuity will kick in. His retirement portfolio is much more predictable and secure with the longevity insurance offered by a DIA. Note that for ease of explanation, this example is on a pre-tax basis.

Longevity annuity rates based on a $100,000 New York Life life-only policy for a male aged-50 with income starting at age 85. Rates as of 10/4/2017.

You can add your spouse to your policy. 

Longevity annuities can be set up as joint annuities, which means that the paychecks continue as long as either you or your spouse live. Structuring the contract like this is a great way to preserve financial stability and quality of life for the surviving spouse

Let's continue to use Alan as our example. Alan expects that he will pass away before his 48-year-old wife, Claire. He wants to know that she'll be okay (at least financially) once he's gone, so he's considering adding her to his longevity annuity. Alan can purchase a joint life policy that's contingent on her life as well, such that income payments continue until both of them have passed away. The income payments will be lower, but they're expected to be paid over a longer period of time. Since their expenses will decrease when it's just Claire, they've opted for a 50% income reduction, which increases their income while they're both alive. 

Longevity annuity rates based on $100,000 New York Life single and joint life-only policies for a male aged-50 and a female aged-48 with income starting at age 85. Rates as of 10/4/2017.

You can plan your riskier investments more easily. 

Adding a longevity annuity to your portfolio makes your retirement planning easier. Knowing that you’ll be receiving a steady paycheck in retirement to cover all or some of your expenses means you can take more risk with how you invest the rest of your money. You can learn more here about how we suggest you pair an annuity with investments to best cover your basic and discretionary expenses.

Your savings are protected from the market and the income you’ll get is pre-determined. 

The savings that you allocate to a longevity annuity aren’t in the market, so they won’t be affected by swings in the stock or bond markets. And, by selecting the refund at death benefit option, you can make sure that all of your savings will be passed onto your beneficiaries if you pass away prematurely.

This can be a drawback for some people. The income the insurance company guarantees you is determined upfront, and won’t grow if there’s market upside. If you’re looking for an investment style product, an immediate annuity isn’t the right solution.

No cash value, but if you need a paycheck early, you can usually get it. 

Longevity annuities are like paychecks rather than savings accounts, so the money you receive each month isn't usually flexible. This can be a downside, as you don’t have withdrawal control over your savings. However, most insurance companies offer the option to receive the next few months of payments in advance, which can be useful in emergency situations. This benefit goes by many names: commutations, withdrawal benefits, or payment acceleration. Each insurance company has different rules as to how many months of payments you can receive at once, and how many times you can utilize the benefit. Ask us for more details.

It’s a simple product. 

Unlike most insurance products, a longevity annuity has a simple structure. For every dollar you contribute in premium, the insurance company will tell you how much you’ll receive every month, starting when you retire and continuing for the rest of your life. There are a couple options in the plan that can affect the level of income you’ll receive, but that’s it.

Longevity annuities work as an alternative fixed income investment. 

While longevity annuities are primarily insurance products, the value they offer can be compared to low-risk fixed income investments, such as an investment grade bond fund. As you approach retirement and no longer want to take sizable equity market risks, you’ll likely move your assets into safe but low returning bond funds. Moving some of those assets instead into a high-rated longevity annuity has the added benefit of providing you with a pre-determined lifetime income stream.

Valuing the pros and cons of a longevity annuity can help determine if a longevity annuity fits into your retirement plan.

How Can I Purchase a Longevity Annuity with Blueprint Income?

At Blueprint Income, we offer annuities from more than 15 top rated insurance companies. Click below to get real-time personalized quotes, where you can compare options offered from different insurers on an apples-to-apples basis.

From there, you’ll get access to our annuity guides, team of specialists to help you analyze your retirement finances and walk you through the application process. If you have any questions about the pros and cons of a longevity annuity in your situation, feel free to email us at support@blueprintincome.com.

Blueprint Income Team

We are a team of finance, insurance, and actuarial professionals working to make it easier for everyone to achieve a steady and comfortable retirement. We write about annuities (the good and the bad) and provide strategies to help Americans prepare for retirement.


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