You’ve got to hand it to the insurance industry’s ingenuity in inventing new types of insurance. While many of these policies are of dubious value, a fairly new species of coverage may in some instances be a worthy alternative to expensive long-term care insurance, or purely for providing an income boost later in life. Longevity insurance, also called “retirement income insurance” will pay you a lifetime income commencing at a later age in exchange for a lump sum payment. (The actuaries, always eager to obfuscate, call them “advanced life-delayed annuities.”) For example, here’s what you get in exchange for a lump sum payment of $50,000 at age 60 with benefits starting at age 85. If a female policyholder survives until age 85 (that’s a big “if,” of course), the policy would pay $34,000 for life each year thereafter. If a male policyholder survives until age 85 (that’s a bigger “if”), the policy would pay a lifetime emolument of $46,000 per annum.

Beware of the fine print. There are all sorts of variations on this theme, some of which offer a refund should you die before the age when the payout commences. But these additional bells and whistles come at a big price in the form of a much lower ultimate benefit. If you’re buying insurance as a substitute for LTC coverage, you want pure coverage, unadulterated by features you don’t need but pay dearly for. By the way, that goes for all types of insurance. In most instances, select old-fashioned basic coverage.

An alternative: Homemade retirement income annuity. If you’re not too enthralled with the above insurance policy, you could alternatively create your own, in actuarial parlance, advanced life-delayed annuity.

Invest $50,000 at age 60 in a variety of tax-efficient index funds, exchange-traded funds, and/or individual stocks.

Assuming 6% annual growth, you would have $215,000 at age 85. Here’s a comparison between the insurance policy, as described above, and your self- insurance plan.

Outcome

Insurance Policy        Self Insurance

You die just before age 85                                $0                                               $215,000

Annual payments assuming

   you live to 100 and are

   female                                                            $34,000                                       $22,000 

In effect, by self-insuring, you will probably give up some income in exchange for the ability to access or pass on principal. In the above scenario, if you die some time before age 100, your heirs will receive any unused money in your “self-insurance account.” On the other hand, if you live beyond 100, you’ve exhausted your account while the insurance policy keeps on paying.

Of course, the benefits are guaranteed with the insurance policy. There are no guarantees when investing on your own. For example, all the money may have to be used for expenses before age 85. Here’s a thought: If your betwixt and between on the real insurance and self-insurance routes, put away half the money you want to invest into each.