Longevity Annuity: A New Way To Save For Long-Term Care

| by team-passare,
Back to Blog

Did you know there’s a new way to save for long-term care? It’s called a “longevity annuity” and it can provide a guaranteed stream of income once you reach old age.
The Treasury Department just announced it will let people shift a portion of their 401(k)s or IRAs into deferred annuities, which is good news for people looking for ways to pay for long-term care. “These annuities make it less likely people will outlive their assets and may make more money available for long-term care just when many are likely to need it,” writes Forbes’ Howard Glickman.

Here are the details:

  • You can use up to 25% of your retirement account balance (up to $125,000) to buy a deferred income “longevity” annuity.
  • Funds used to purchase the annuity are exempt from the required minimum distributions rules within 401(k)s and IRAs that force you to take annual distributions starting at age 70 ½.

The big idea of the longevity annuity is you pay a lump sum up front, then when you’re around 75 or 80, you will begin to receive regular payments, which is around the time many people begin to need long-term care.

Of course there are risks to investing in the product: You might pass away before you make back your initial investment much less earn a return. Or inflation could eat away at the value of that future income.

In the past, many consumers have shied away from buying deferred annuities in large part because they pay only during the purchaser’s lifetime. To make the product more attractive, the Treasury has included two features (on deferred annuities) that have become popular with investors:

  • A “return of premium” where the insurance company will refund money that has not yet been paid out
  • A rider that allows you to designate a beneficiary who will continue to receive payments after the buyer’s death.

In the end, these annuities “make sense for many consumers,” writes Glickman. “But will potential buyers get comfortable with them and if they do, will insurance companies really try to build a mass market around them?”

It remains to be seen whether people will embrace this admittedly complex product but what is undeniable is the new Treasury rule creates another (much needed) alternative for people looking to save for their long-term care.

Read the story here.

Leave a Reply