Longevity Annuity: How Does It Work?

Hi there, Stan The Annuity Man, America's annuity agent, licensed in all 50 states. Yes, that includes yours. Today, we're talking about longevity annuities and how they work. Let’s dive into how they work and why they’re called longevity annuities.

Longevity Annuities Explained

Why the word “longevity”? Longevity refers to how long you’re going to live. One of the fears that people have is outliving their money. You don’t want to outlive your money, right? No, you don’t. Okay, so what happens? Annuities are the only product on the planet to solve longevity risk, which means outliving your money. They’re going to pay, regardless of how long you live.

The Monopoly of Lifetime Income

Alright, I digress just a tad. Annuities have a monopoly on lifetime income. It’s the only product on the planet that provides lifetime income. That’s it. Now, if I’m the annuity czar for the day, regardless of who the president is, if they said, "Okay, Stan The Annuity Man, you’re going to be the annuity czar. You’re in charge of all annuities." What would I tell people? I’d say: annuities equal lifetime income. Lifetime income equals annuities. Annuities equal lifetime income. Annuities take care of longevity risk. It would be Pavlovian.

For those who don’t know Pavlov, you’d understand that annuities equal lifetime income. This leads us back to longevity annuities. In the business, they’re called Deferred Income Annuities (DIAs).

Another version of a Deferred Income Annuity is called a QLAC (Qualified Longevity Annuity Contract). But let’s not get into those specifics. Let’s talk about the broader view of how they work. They’re a transfer of risk products and strategies where you can defer income. In other words, you can say, "Okay, I want to plan for income seven years from now, ten years from now, fifteen years from now, or even forty years from now. I want to know exactly what that income stream will be." You can do that with a Deferred Income Annuity, aka a longevity annuity.

How They Work

You can run the quote through Stan The Annuity Man’s calculators (I have the best calculators out there). You’ll quote all carriers for the highest contractual guarantee for your situation. But what are the payments based on? The payments are based on your life expectancy at the time you take the payment. Or if you set it up with a spouse or joint with anyone else, it’s based on your joint life expectancy at the time you start receiving payments. It’s a transfer of risk. You’re transferring the risk to the annuity company to pay for the rest of your life.

Now, you can structure it and customize it so that 100% of any unused money—if, for example, your Learjet hits the mountain or your Bentley hits a tree (what is it, producer?)—or if the coronavirus takes you out (I’m laughing about that, I hope it’s not as serious as it seems). But if that happens and you don’t turn on the income stream, we can set it up so that 100% of the unused money goes to your beneficiaries, but the annuity company is still on the hook to pay. That’s how that works.

Return of Principal Plus Interest

Another thing to keep in mind is that annuity income, regardless of type (and in this case, longevity annuities or deferred income annuities), is a combination of return of principal plus interest. Return of principal plus interest. So, the question arises: What happens if my account goes to zero with my Deferred Income Annuity (longevity annuity)? What happens then?

The good news is that they’re still going to pay. I have thousands and thousands of clients who have outlived their life expectancy with nothing left in their accounts, and they’re still getting paid. What is that? That’s called no ROI until you die. ROI stands for Return on Investment. These are transfer risk products. Longevity is the risk of outliving your money; annuities solve longevity risk. So, you really don’t know the ROI until you die.

Longevity Annuities vs Social Security

As the top agent in the country, annuities are not investments. They’re contracts, policies, and transfer risk contracts with the annuity companies. People ask, "Well, I still don’t get it, Stan The Annuity Man. Explain a little more about deferred income annuities and longevity annuities." Let me be clear. You own Social Security, or you’re going to get it or already getting it. 

That’s a Deferred Income Annuity. It works the same way. People say, "I will wait until I’m 70 to get my Social Security payments. They’re going to be higher, Stan The Annuity Man." Why is that? Because you’ll be older, which means a shorter life expectancy, fewer payments, and therefore higher payments. Guess what works just like Social Security? A longevity annuity is a Deferred Income Annuity. But they’re commodity quotes.

When you quote at The Annuity Man, we quote all carriers for the best contractual guarantee for your specific situation. You can customize that quote, and the best part? You can talk to the number one annuity team in the country.

Summary

Let’s summarize what I just said about longevity annuities and how they work. Remember, commodity quotes are based on your life expectancy at the time you take the payments. By the way, interest rates play a secondary role, not a primary role, in pricing. When you get income from a longevity Deferred Income Annuity, it’s a combination of return of principal plus interest. Don’t get caught up on interest rates as the primary factor in pricing. They are not.

So, if you want income in the future, Deferred Income Annuities are a contractual way to solve that. And by the way, there are no annual fees, market attachments, or moving parts. It’s very simple. You could explain it to a nine-year-old. But I’m telling you, it’s the Warren Buffett rule: If you don’t understand it, don’t buy it. With a Deferred Income Annuity, you’ll totally understand the product.