Longevity Insurance Included in Retirement Plans - Retirement | Financial Buzz

Longevity Insurance Included in Retirement Plans

Longevity, Workers, Insurance, Premium, Annuities, Workers now have the option of purchasing a kind of annuity – commonly termed as longevity insurance – under their retirement arrangements. This kind of insurance is created so that people are not exhausted of their savings as they grow older.

Understanding the insurance 

Longevity insurance is in technical terms, a type of deferred income annuity. Under this proposal, an individual pays a premium (usually a lump sum amount) to the insurer in-lieu of an income stream which is guaranteed to continue for a lifetime. This income stream, however, is likely to open up quite late in a person’s life, most probably around the early 70s.

Restrictions, until now

These variety of annuities, until now, could not be utilized in 401(k) plans for retirement and also for individual retirement plans as the mentioned plans need their account holders to start the withdrawals when they cross the age of 70years. These withdrawals are termed required income distributions.

However, the US Treasury Department has recently made an announcement that it is now possible for workers to satisfy the rules in case they utilize a slice of retirement money to purchase annuities and start collecting income within 85 years of age. This is a component of the wider effort by the Obama administration to offer Americans a layer of financial security post retirement.

Participants of the retirement plans can bypass distribution rules by utilizing less than 25 percent of the account balance, or a sum of $125,000, whichever is of lesser amount. The increase in living expenses over time will be adjusted for maximum dollar sum.

Present rules

Under the present rules, applicable annuities should be comparatively basic and prohibited from offering special characteristics like inflation riders. However, the suppliers of annuity can sell a particular feature, which gives the guarantee that the beneficiary of the annuity owner will be the recipient of the premium amount which was originally paid, after subtraction of disbursed payments. An option of paying income to the beneficiary after the death of the annuity owner is also offered.

Although such options tend to incur greater upfront costs or lead to an reduction in the income stream, many individuals purchase them, nevertheless. The reason is that any individual will be unwilling to spend huge quantities of money without any kind of guarantees. According to officials of the Treasury, they wanted the potential buyer to feel at ease when purchasing the annuities, but also wanted to restrict insurers from selling extra features, which can lower the income amount stream.