As with a deferred annuity, those who purchase such products invest money upfront in exchange for future payments. But like an immediate annuity, the payout benefit is calculated at the time they invest in the contract -- typically just before or after retirement, at around age 65.
The size of the income payout adjusts based on how old you are at the time of purchase.
For example, a man who pays $50,000 for MetLife's longevity insurance product at age 50 would receive annual income of $42,997 once he reaches age 85, according to the company's brochure. Assuming an inflation rate of 2.5 percent per year, that annual payout is equivalent to $18,118 in today's dollars.
He would receive about half that amount -- $21,741 per year -- if he purchased the same contract at age 60, and $15,439 if he bought it at 65. That's equivalent in today's dollars to annual payments of $11,727 and $9,422, respectively. Female policyholders receive slightly less, since statistically they have longer life spans.
To counter the erosive effects of inflation, insurance companies, including MetLife and Hartford, offer longevity products with an inflation hedge -- for a price.
Anthony Webb, a research economist with the Center for Retirement Research at Boston College, says it's worth investing a little extra to purchase a policy that includes some form of inflation protection since those who purchase longevity insurance won't collect a benefit for up to 30 years.
"You want real dollars rather than current dollars," he says.
Longevity insurance products offer considerable comfort to those who worry about having to move in with their kids during retirement. But they come with some significant drawbacks, too. The biggest is that basic longevity policies are sold on a use-it-or-lose-it basis.
If you die before benefits kick in, you lose the money you put into it. Most do not include a death benefit, meaning your heirs don't get to collect, either.
Another downside to longevity insurance is that, once invested, the money you use to purchase the contract is locked up. You won't be able to tap those funds if you need to.
"These policies do provide a very large payout if you happen to live that long, but the fact that you're going to put X amount of dollars into it and not be able to get to access that money for 30 years, if you even live that long, is a big concern," says Jason Stewart, president of Cohen Financial Services in Leawood, Kan.