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Insurance that pays if you stay alive

Now you can buy insurance that pays you for staying alive. This so-called “longevity insurance’’ pays you an income for life, but only if and when you make it to a certain age. It guards against the risk of outliving your money, arguably the top financial risk retirees face.

While these policies are not widely available, several companies have started offering them. More are sure to follow, targeting baby boomers who worry about depleting their savings in old age.

“We all understand the concept of insuring tangible assets such as our home and our vehicle against loss,” said John Diehl, a certified financial planner with The Hartford Financial Services Group, a major insurer. “What too few people realize is that a nest egg can be insured.”

The decision to buy such a policy requires careful thought, however, because large sums are at stake.

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For example, under The Hartford’s “Income Security” policy, a 65-year-old man would pay $76,600 today to start receiving $1,000 a month for life at age 75. For the same monthly income starting at age 80, he would pay $43,350. For income at age 85, it would be $23,750. Premiums for a 65-year-old couple, with income continuing until both spouses die, would be $94,000, $59,400 and $33,800 respectively.

“With a modest up-front investment, this product enables people to ensure a steady stream of income for the rest of their lives, no matter how long they live,’' the company pitch goes.

Now for the all-important disclaimer: “The Hartford Income Security has no cash or surrender value and does not allow for withdrawals.” Translation: There is no principal to access and the only money you’ll see is the $1,000 a month for life, whenever it begins.

At least your heirs are not left out in the cold. The premiums quoted for The Hartford policy include a “return of premium” death benefit so that, if you die before getting back as much as you paid, a beneficiary gets the rest in a lump sum. Or if you die before the monthly payments begin, your beneficiary gets the full premium back.

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So, is it worth it for a 65-year-old to part with $76,600 today to get $1,000 a month for life at age 75? Or $43,350 for income at age 80, or whatever the figures may be?

For starters, you need to think of this policy as insurance, not investment.

Statistically speaking, a 65-year-old man is likely to die before his 83rd birthday. The odds are that you - and your heirs - will have more money to spend if you invest the money on your own.

But with the longevity insurance, you’ll have the peace of mind of knowing the payments will continue as long as you live. These policies make the most sense if you are in good health, expect to live a long life and can afford the premium from current savings without unduly affecting your lifestyle.

Then, with the policy in place, you may be more confident of spending down other assets sooner until the monthly income kicks in.

Another option would be to save the money you would have spent for the longevity insurance and buy an immediate annuity later, when you want to begin receiving income.

For example, a 75-year-old man today would pay about $127,000 for an immediate annuity paying him $1,000 a month for life, with payments guaranteed to continue to a beneficiary if needed until the full premium is recovered. A 65-year-old investing $76,600 and earning 5.25 percent a year after taxes would have $127,000-plus at age 75, when he could decide whether he wants the immediate annuity. Of course, premiums and terms could be different then.

To make the comparison valid - longevity insurance now or immediate annuity later - you need to ask the insurance company how much of each monthly payment would be taxable in each case.

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