The single best “longevity insurance policy” available in the United States is something you already own. It is your social security benefits.
There has been a lot of talk lately about the value of buying some sort of longevity insurance and lots of insurance salesmen are out there pushing various types of products. Many of these are quite complex, although the concept is straightforward. In exchange for money now, an insurance company promises to pay you a particular amount after you reach a certain age. For example, you might start receiving monthly payments after your 85 birthday. The idea is to help make sure that you don’t come up short financially if you achieve a very old age.
The basic idea is a very good one. It is surely true that many of us are living longer. The danger of outlasting one’s money is very real and potentially dire. Prudence dictates considering what can be done now to insure financial comfort in the event we reach very old age. Not surprisingly, the insurance and financial industries have stepped up to offer various products to address this need.
The problem, however, is that these products can be expensive. As with any insurance, a potential buyer must weigh the benefits against the price tag. There is no such thing as insurance that is wise at any cost. Rather, the value of a policy is directly related to having obtained it for a reasonable price. Caveat emptor (“let the buyer beware”) is as true when dealing with the insurance industry as it is in any other part of our lives.
What makes the question of longevity insurance unique, however, is that you already have the single best vehicle for assuring your financial well-being in old age. Social security will provide you with what is essentially a life annuity. It has built-in inflation protection and the advantage of being guaranteed by the strongest financial player in the world. You could not design a better “longevity insurance policy” if you tried.
Unfortunately, the amount of your social security benefits is pretty much fixed. You cannot call up and say “double my benefits and I will pay a higher monthly premium.” Indeed, the push to sell longevity insurance is based on the somewhat modest benefit tables you will find at the social security website. What if you want more coverage?
There is one way to increase your social security benefits, though, and it fits perfectly with the concept of social security as longevity insurance. The program allows you to delay benefits in return for larger monthly payments.
The earliest age at which you can claim benefits, and start receiving a monthly check, is even before you reach what is called “full retirement age.” If you elect these earlier benefits starting at age 62, though, you will receive less each month for the rest of your life. Unless you are in dire need, this is a very unwise choice. (For a game theory based analysis of why not to claim early, CLICK HERE )
By waiting until your “full retirement age” under the program, you will receive a greater amount for the rest of your life. Note, though, that the Social Security Program allows you to defer claiming benefits a little bit longer in exchange for still greater monthly payments. For every year beyond “full retirement age” that you hold off, your payments will be increased by about 8%. Under current law, this method of growing the monthly benefit will continue until you reach age 70. At that point, there is no further increase and it would be folly to defer claiming beyond that age.
Waiting until age 70 to claim your social security benefits is the equivalent of buying greater benefits for the cost of not receiving them in the earlier years. If you can possibly afford it, this is a very good buy. You can increase the payout of the very best longevity insurance available in the USA. In essence, you are buying more insurance against outliving your money. Doing so is highly recommended.
Before considering the purchase of some commercial insurance or annuity product to protect against longevity, consider your best alternative. Might a better choice for protection against very old age be to employ the “wait to claim” social security strategy?