Longevity bonds and longevity annuities are financial instruments or a form of insurance that bet against outliving ones savings through mortality rates. These longevity products enable clients to use a small portion of current savings to buy guaranteed income for their later years of retirement, providing financial security for when they need it most.
Types of longevity investments
Longevity Annuities are sometimes referred to as a "deferred payout" annuity or longevity insurance. It is a new spin on deferred fixed annuities, which are typically tax-deferred vehicles set up to provide a guaranteed income stream starting at a predetermined point in the future so that you can reduce your work dependency.
Longevity bonds pay a coupon that is proportional to the number of survivors in a selected birth cohort; letting the cohort be the number of individuals turning sixty-five in the year that the bond is issued, the coupon the following year would be proportional to the number in the cohort that survive to this year. Since this payoff approximately matches the liability of annuity providers, Longevity Bonds create an effective hedge (finance) against longevity risk.
Longevity risk
Longevity risk in conjunction with interest rate risk has created problems for the annuity market. As the population age 65 and over is increasing at a faster rate than the total population the number of Baby Boomers nearing retirement is exploding. The annuity markets will grow as will the risk and consequences of underestimating mortality improvements.
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