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What Are Advanced Life Deferred Annuities?

One of the more intriguing annuities of all is the advanced life deferred annuity (ALDA), also called pure longevity insurance. Typically people who purchase an ALDA

  • Are between the ages of 50 and 60.

  • Use 10 to 30 percent of their retirement savings to fund it.

  • Begin receiving guaranteed monthly income at age 80 or 85.

If that sounds like a terrible investment to you, your instincts are spot-on. In fact, an ALDA isn’t an investment at all. It’s insurance against longevity — the risk that you may outlive your savings. And because your chance of living really, really long is only so-so, the insurance companies can afford to make ALDAs fairly cheap.

The world isn’t quite ready for ALDAs. Not many people have heard of them let alone purchased one. Only a few insurance companies market them with any enthusiasm. But, when you crunch the numbers, you see that ALDAs may be the most cost-effective way to cure one huge retirement headache: figuring out how much money to put in reserve just in case you happen to live a long, long time.

In a simple, no frills ALDA, your decision to take income at age 85 is unchangeable; if you and your spouse die before payments begin, you forfeit your initial payment. However, because insurance carriers know that most people will balk at those terms, the carriers are likely to offer one or more of the following features:

  • Cash refund: If and your spouse both die before collecting the amount of your initial payment, the insurance company pays your beneficiaries the unpaid balance.

  • Death benefit: If you die before you receive any income, your beneficiaries may receive a death benefit.

    One company offers a death benefit equal to your initial payment growing at a compound interest rate of 3 percent. If you pay $20,000 for your ALDA at age 60 and die at age 81, your heirs will receive $37,206.

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