The Market for Longevity Annuities

Abstract

Using a portion of accumulated assets to purchase a longevity annuity—which provides fixed income payments that begin in late old age with a substantial delay from the time the contract is purchased—offers a cost-effective means for individuals to insure against running out of money in retirement. Despite their conceptual appeal, sales of such products to date have been vanishingly small. The article discusses the factors that have inhibited consumers, employers, and insurance providers from participating in the market for longevity annuities and proposes reforms that could help to develop that market. These reforms include stronger efforts to educate consumers about the risks they face in retirement; permitting insurance companies to mention the existence of state guaranty funds when marketing annuity products; creating a more transparent safe harbor for employers who offer annuities within their retirement plans; and taking steps to develop or support the development of longevity bonds, which would allow insurance companies that offer longevity annuities to better hedge against the associated aggregate longevity risk.