Car races can be exciting. So can football games. But we're not really talking excitement until we talk about insurance, right? Surely I can't be alone in waiting with bated breath for the next thrilling offering from the insurance industry: longevity insurance!
Given that Americans are living to ripe old ages these days, and will continue doing so, many of us may be wondering whether we'll run out of money before we die. (Such worriers would do well to test-drive our Rule Your Retirement newsletter, for free.) In order to address this fear, and the potential need for money late in life, our friends in the insurance agency have devised longevity insurance. You pay a sum now, and beginning at a certain later date, you'll start receiving a set sum of money each month for the rest of your life.
In The Wall Street Journal recently, Aleksandra Todorova demonstrated one of the product's benefits -- relatively large payouts:
". . . if a 65-year-old man invested $10,000 in a deferred fixed-income annuity from MetLife (NYSE: MET), in 20 years he would start collecting $137 a month, assuming the investment grew at the minimum guaranteed rate of 3%. But if that man instead invested in MetLife's longevity product, his monthly payout would be $665."
Enticed? Here are some advantages of the product:
- It tends to offer bigger payouts than alternatives such as deferred annuities. Given that, it can cost you less to achieve the income you want.
- The payments keep coming for the rest of your life.
- The amount of the future payments is generally known, fixed when the papers are signed.
Are there any drawbacks? You bet:
- There's no death benefit. If you die before the payments start, the insurance company wins. And regardless, there will be nothing left for any would-be beneficiaries.
- You lose the ability to use the money you invest in this product for other investments. The stock market, for example, may surge while you wait to begin receiving your monthly payments. (Some other insurance products offer returns that reflect market performance to some degree.)
- As Todorova noted, another drawback is that this is a new product, with little competition to drive down prices. Indeed, insurance agents who sell it reportedly receive commissions of around 6%. (This can entice some ethically challenged agents to push the product onto people for whom it may not be best.) This commission will take a big chunk of your investment with it.
One last thing to remember is that since the product is new, we can expect lots of changes and varieties of it to pop up soon; policies that return some of your investment, for example, or ones that can keep up with inflation.
Before you sign . . .
So before you sign up for such a service, take time to learn much more about it. If you're far enough away from retirement, you might avoid this kind of product altogether by investing in some solid, growing companies for the next 20 to 30 years. To appreciate how ordinary companies can make you wealthy, check out the following companies' compound average annual returns over the past 20 years:
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Applied Materials (Nasdaq: AMAT): 26%
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Best Buy (NYSE: BBY): 24%
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Walgreen (NYSE: WAG): 18%
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Wrigley (NYSE: WWY): 17%
Those returns could give you a lot to live on in retirement.
Keep learning
Meanwhile, learn more about the not-exciting-but-still-critical topic of insurance in our Insurance Center. You may not have thought about some kinds of insurance, such as disability or long-term care insurance, but they're vital for many people. And, of course, properly insuring your property is vital, too. Take a little time to learn more. Should some calamity occur in the future, you may be very happy you did.
These articles may also be of interest:
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Longtime Fool contributor Selena Maranjian owns no shares in any company mentioned. The Motley Fool has a full disclosure policy.
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