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By Adam Zoll and Christine Benz | 07-24-2014 02:00 PM

Should You Add Longevity Insurance to Your IRA?

New Treasury Department rules firm up the usage of longevity annuities within IRAs, but retirement investors need to weigh the pros and cons of adding these contracts to their portfolios.

Adam Zoll: For Morningstar, I'm Adam Zoll and welcome to The Retirement Radar.

Here to discuss recent developments in the area of retirement planning is Morningstar's director of personal finance Christine Benz.

Christine, thanks for being with us.

Christine Benz: Adam, it's great to be here.

Zoll: There were some recent developments involving a product called a longevity annuity and what it means potentially for retirees. What can you tell us about what a longevity annuity is, and what the recent developments were?

Benz: In contrast with an immediate annuity, where the payouts start immediately as soon as you give the insurer your money, a longevity annuity means that the payments start at some later date. So, if you purchase the annuity at, say, age 65, you will get a stream of payments starting at age 85.

These types of products have been around for a while, but in the past what had been an impediment to really using them, certainly within an IRA, was the role of RMDs. If your payments don't start until you are 85, but RMDs are supposed to commence at age 70 1/2, what happens with this product?

The new regulations issued by the Treasury Department firm up the role in the usage of these longevity annuities within IRAs. As long as you stick within certain limits, so you don't put more than 25% of your total IRA portfolio in the longevity annuity contract, or it's not more than $125,000 (it has to be the lesser of those two figures), you are able to put that product within an IRA, and it is deemed to count toward your RMDs, because the supposition is that you will begin taking money out of it at some point down the line.

Zoll: In general, what are some of the attractive features of the longevity annuity product?

Benz: I think the key one is it allows a retiree to plan for a knowable time horizon. You might say, with a pretty good probability of success, my portfolio will last until I'm 85. If I turn out to live until age 95, I'm not so sure. So it allows you to guarantee yourself an income stream for those later years if you end up being someone with a much longer-than-average lifespan.

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