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New Estate Planning Option: Longevity Insurance

One of the most important parts of elder care is ensuring that you or your loved one is financially secure in later years. A wide variety of financial tools and plans are available to help structure this care for seniors, but as of July a new tool has been introduced for retirement planning that has not been widely available before – longevity insurance.

What is Longevity Insurance?
Longevity insurance is also known as a deferred-income annuity. You pay a lump sum of money as a premium to an insurer in exchange for a lifelong stream of income that begins years later, even as late as your 70s or 80s. Before July, longevity insurance could not be widely used in 401(k) or other individual retirement plans because those types of plans require that the holder start making withdrawals at age 70½. The rules have now been changed that allow workers to purchase these annuities if they use a portion of their retirement money and begin to make withdrawals by age 85.

Why is Longevity Insurance Available Now?
The federal government announced these changes to longevity insurance as part of its plan to broaden the options available to seniors and provide Americans with more financial security in retirement. The administration believes that this will help seniors plan for retirement and ensure that there is a constant stream of income available for as long as they live.

Before July, less than twenty percent of all 401(k) retirement plans offered any type of deferred-income annuity, and few people ever elected to exercise the option. The administration is hoping that by changing the rules more people will take advantage of this retirement tool. The Treasury department has stated that workers will have some flexibility in choosing their longevity insurance plan. If you purchase an annuity later in life you can start making withdrawals later, as well.

Specifics of Longevity Insurance Plans
In order to partake in the new option of longevity insurance a worker can use no more than twenty-five percent of their retirement balance or $125,000 to purchase the plan, whichever is less. If you accidentally exceed the limit for purchasing a plan you will be allowed to correct the error without penalty. In addition, the annuity plan must be relatively basic and cannot come with many of the special features that insurance providers sell with other plans. However, one feature that will be allowed is a rider that guarantees the beneficiaries of the account the original premium paid, minus any distributions. Another option that is available is to have the longevity insurance continue to pay out to a beneficiary after the original holder’s death.

The reason for the limited options on the longevity insurance plans is that the government does not want it to be too difficult to compare the prices of the plans. Having fewer options also decreases the chance of insurers selling plans with so many extras that the income stream is greatly reduced. However, by allowing a couple of extra options on the annuity plans participants can purchase longevity insurance with some level of guarantee on the payout and the security of knowing that they or their loved ones will be taken care of in their senior years.

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