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Ask the expert: How does a longevity annuity work?

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The question was: I know that longevity annuities are designed to provide lifetime income to elders but I’m not sure how they work. Can you explain? Also, how available they are?

The answer is: “A longevity annuity might be viewed as a hybrid of a deferred annuity and an immediate annuity.

“Like the former, it is purchased in advance of the annuity starting date–typically, well in advance. However, like an immediate annuity, it offers no accumulation benefit and may provide for no benefits at all unless and until the annuitant reaches a certain age.

“…Very few insurers currently offer longevity annuities, although several are considering adding it to their portfolios.

“It is virtually certain that the product will evolve over time, as market forces (the demands of consumers and advisors in the distribution channel) dictate.

“At this time, there are two basic versions: The first is…a ‘pure’ longevity annuity, providing no benefits until the annuitant reaches the annuity starting age.

“The second provides for some benefits before that event–either a death benefit, a cash value, or both–and may allow the contract owner to commute remaining annuity payments after the annuity starting date.”

Source: This is an excerpt from The Annuity Advisor, 2nd edition, by John Olsen, CLU, ChFC, AEP, and Michael E. Kitces, MSFS, CFP, CLU, ChFC. The book was published in 2009 by The National Underwriter Company, Cincinnati, Ohio. See pp. 215-216. Learn more about The Annuity Advisor .