Longevity risk is the risk of living longer than your money lasts. It is not a health risk and it is not a market risk. It is the arithmetic problem created when a fixed pool of savings has to cover an unknown number of years, and the unknown number turns out to be large.
Actuaries, pension trustees and annuity companies use the term constantly. Households almost never do, which is a problem, because households bear it. A pension plan can pool longevity risk across thousands of members. An individual retiree cannot pool anything. If Margaret lives to 97, Margaret alone absorbs the consequence.
Rather than describe the concept abstractly, this page follows one household through twenty years with real dollar figures, and shows precisely where the plan breaks. The figures below are illustrative composites built from published survey data, not a guarantee of anyone’s outcome, and every one of them should be replaced with your own numbers before you decide anything.
In This Article
Meet the Numbers: Margaret at 78
Margaret is 78, widowed for four years, living in the house she and her husband bought in 1986, which is paid off.
Income. Social Security of $2,450 a month, which is $29,400 a year. She took her late husband’s higher benefit as a survivor. There is no pension.
Assets. $310,000 in a traditional IRA. $28,000 in a savings account. The house, worth roughly $340,000. A $250,000 universal life policy on her own life, issued in 1998, on which she pays $4,900 a year.
Spending. $52,000 a year, all in — property taxes and insurance of $7,800, Medicare Part B and a Medigap plan, prescriptions, food, utilities, car, home maintenance, and the premium on that policy.
The gap is immediate: she spends $52,000 and receives $29,400, so she draws roughly $22,600 a year from savings, before taxes on the IRA withdrawals. Call it $27,000 of gross IRA withdrawals to net that amount after federal tax.
How long does she need the money to last? This is where longevity risk becomes concrete. The Social Security Administration’s period life tables put remaining life expectancy for a 78-year-old woman at roughly ten to eleven years. But life expectancy is a median, not a deadline. SSA has long noted that about one in three 65-year-olds today will live past 90, and about one in seven past 95. Margaret is already 78, which means she has outlived a portion of the mortality curve, and her conditional life expectancy is higher than it was at 65. Planning to her median leaves roughly a coin flip that the plan fails.
Year 10: The Plan Still Looks Fine
Run the arithmetic forward at a 5 percent average return on the IRA and 3 percent inflation on her spending.
Spending of $52,000 growing at 3 percent reaches about $70,000 by age 88. Social Security, with cost-of-living adjustments that have averaged roughly 2 to 3 percent over long periods and were higher in the inflationary years of 2022 and 2023, reaches roughly $39,000. The gap is now about $31,000, and gross IRA withdrawals to fund it are pushing $37,000.
The IRA, meanwhile, has been earning 5 percent and paying out an escalating amount. At age 88, the balance lands somewhere in the neighborhood of $180,000 to $210,000, depending on the sequence of returns. Savings are largely gone, spent on a roof and a car.
At this point Margaret’s financial adviser, if she has one, tells her the plan is working. And it is — because she has not yet hit the two things that break it.
Note what has already happened invisibly. The $4,900 policy premium has consumed roughly $49,000 of cumulative cash flow over the decade, which at this scale of portfolio is a meaningful share of the drawdown. Nobody has looked at that policy since 1998.
Year 15: The Two Things That Break It
Break one: care. At 93, Margaret needs help. Published cost-of-care surveys, the Genworth Cost of Care Survey being the most widely cited, have put recent national medians roughly in these ranges: a home health aide at about $33 an hour, which at 44 hours a week is around $75,000 a year; assisted living in the mid-$60,000s a year; and a private nursing home room well above $100,000 a year. Confirm current figures for your own county, since regional variation is enormous — the same level of care can differ by a factor of two or three between states.
Even the cheapest of those options roughly doubles Margaret’s annual spending. The remaining IRA balance, which looked like a decade of cushion at $70,000 a year, becomes about a year and a half at $145,000 a year.
Break two: the policy lapses. Universal life issued in the 1990s was frequently illustrated at crediting rates that never materialized. As the cash value erodes, the cost of insurance charges — which rise steeply with attained age — consume it faster. Margaret’s policy, which she has funded for 28 years, is projected to lapse at 94 unless she increases the premium substantially. If it lapses, she receives nothing for $137,000 of cumulative premiums.
That is longevity risk in one paragraph. Not a market crash. Not a bad decision. Just more years than the plan assumed, and two costs that arrive at the far end of them.
| Margaret’s Age | Annual Spending | Social Security | Drawn From Savings | IRA Balance |
|---|---|---|---|---|
| 78 | $52,000 | $29,400 | About $27,000 gross | $310,000 |
| 83 | About $60,000 | About $34,000 | About $31,000 gross | Roughly $250,000 |
| 88 | About $70,000 | About $39,000 | About $37,000 gross | Roughly $190,000 |
| 93, care begins | About $145,000 | About $45,000 | About $120,000 gross | Depleted within about 18 months |
What Actually Reduces Longevity Risk
Only a few things genuinely address it, and it is worth being honest about which.
Guaranteed lifetime income. Social Security is the largest longevity hedge most households own, which is why delaying a claim to 70 — where feasible — is one of the few decisions that unambiguously reduces this risk. A single premium immediate annuity converts a lump sum into income that cannot outlive the annuitant. A qualified longevity annuity contract, or QLAC, goes further: it is a deferred annuity purchased inside a retirement account that begins paying at an advanced age, commonly 80 to 85, and the amount used is excluded from required minimum distribution calculations. SECURE 2.0, enacted in December 2022, removed the earlier percentage-of-account limit and set a dollar cap of $200,000, indexed for inflation and $210,000 for 2025. Confirm the current year’s limit with the IRS. The trade-off is real — the money is gone as a liquid asset, and if the annuitant dies early the estate may receive little or nothing.
Spending flexibility. The mathematically strongest tool most people have, and the least discussed. A household that can cut spending 15 percent in a bad year survives sequences that break a rigid plan.
Home equity. Margaret has $340,000 sitting in a house. Downsizing, or a reverse mortgage under the FHA Home Equity Conversion Mortgage program with its required HUD-approved counseling session, converts that into spendable resources. Both carry costs and both deserve independent advice.
The insurance asset nobody has examined. This is the one that belongs on this site, and it is the one most often overlooked in Margaret’s situation.
Margaret’s Policy: Run the Actual Comparison
Margaret has four options for that 1998 policy, and each produces a different number.
Keep paying. Costs $4,900 a year and rising, and the in-force illustration says it lapses at 94 at that premium. If she dies at 91, her heirs get $250,000. If she dies at 97, they get nothing and she will have paid roughly $180,000 in total. Whether this is the right answer depends entirely on whether anyone actually needs the death benefit — and Margaret’s children are financially independent adults in their sixties.
Stop paying. Coverage ends, she recovers nothing beyond whatever residual value the contract allows, and she saves $4,900 a year. This is the outcome that happens by default when nobody looks.
Surrender it. She receives the cash surrender value, which on a 28-year-old universal life policy with eroded accumulation may be a small fraction of the death benefit. Surrender value is a contractual number, not a market number — see what cash surrender value represents.
Have it reviewed for a sale. The federal Government Accountability Office study of the secondary market, GAO-10-775, found that policyholders who sold typically received in the range of roughly 10 to 35 percent of face value, and several times what the same policies would have paid on surrender. Whether Margaret’s policy is a candidate depends on her age, her health, the death benefit and the premium required to keep it in force. She is 93 in this scenario with real health conditions, which is exactly the profile where the secondary market pays the most — because a buyer prices a policy against a projected life expectancy. That inversion is explained at life expectancy underwriting.
Note the symmetry with the rest of this page. Longevity risk to Margaret is the risk of living too long. Longevity risk to a policy buyer is the same risk, from the other side of the table. A buyer who purchases a policy on a life expectancy of eight years and watches the insured live twenty has lost money, which is why offers are conservative and why an insured who outlives the projection has, in a sense, won — a scenario we cover at living longer than the life expectancy report.
The Terms Longevity Risk Is Confused With
Mortality risk is the opposite risk — dying sooner than expected. Life insurance protects against mortality risk. Annuities protect against longevity risk. They are mirror images, which is why the same insurer can sell both and hedge one against the other.
Sequence of returns risk is the risk that poor market returns arrive early in retirement, when the portfolio is largest and withdrawals do the most permanent damage. It compounds longevity risk but it is a different mechanism.
Inflation risk is the erosion of purchasing power. It is the reason Margaret’s $52,000 became $70,000 with no change in lifestyle.
Morbidity risk is the risk of needing care, which is what actually broke the plan at 93. It is often the largest single number in a longevity scenario, and it is the one that long-term care insurance and hybrid policies are designed to address.
Longevity risk versus life expectancy. Life expectancy is a median. Longevity risk lives in the tail beyond it. Planning to a median means accepting roughly even odds of running out. This is the single most common planning error in this area.
What to Do About It This Month
Five concrete steps.
First, plan to a long horizon rather than to a median. If the household is currently 78 and in reasonable health, running the numbers to 95 or 97 is not pessimism, it is arithmetic.
Second, identify how much of the income is guaranteed for life and inflation-adjusted. For most households that means Social Security and nothing else. Knowing the number is half the work.
Third, price out care in your own county rather than using a national median. The variation is enormous.
Fourth, request an in-force illustration on every permanent life insurance policy in the household, at three scenarios: paying the current premium, paying the minimum required to carry the policy to age 100, and stopping premiums entirely. This is free, it takes one phone call to the carrier, and it is the single most overlooked document in retirement planning. Then compare that against what the policy might be worth if it is no longer needed.
Fifth, take annuity and reverse mortgage decisions to a fiduciary adviser who is not paid by the product. Pine Lake Legacy is not a licensed investment adviser and does not give personalized financial, tax or legal advice. What we do is review an in-force life insurance policy at no cost and tell you honestly whether keeping it, reducing it, surrendering it or selling it makes the most sense given your numbers. Send the policy cover page or call (732) 978-9575.
Frequently Asked Questions
How long should I plan for my money to last?
Longer than life expectancy, because life expectancy is a median rather than a deadline. The Social Security Administration has noted that roughly one in three 65-year-olds will live past 90 and about one in seven past 95. Planning to the median accepts close to even odds of outliving the plan, which is the core of longevity risk.
Is longevity risk the same as running out of money in a market crash?
No, though they compound. A market crash early in retirement is sequence of returns risk. Longevity risk is simply more years than the plan assumed, and it would exist even with perfectly steady returns. The two together are what usually breaks a plan, and only one of them is under anyone’s control.
What is a QLAC and does it help?
A qualified longevity annuity contract is a deferred annuity bought inside a retirement account that starts paying at an advanced age, commonly 80 to 85, with the purchase amount excluded from required minimum distribution calculations. SECURE 2.0 set the cap at $200,000, indexed, and $210,000 for 2025. Confirm the current limit with the IRS.
Does a life insurance policy protect against longevity risk?
Not directly. Life insurance pays when you die, so it protects against dying sooner than planned, which is the opposite risk. Where it matters to longevity is as an asset: an unneeded policy consuming premium every year is a drain, and if it is no longer needed the money spent on it is money not available for care.
Should I stop paying premiums to preserve savings?
Not before you look at the alternatives, because lapsing is irreversible and returns nothing. Request an in-force illustration and the cash surrender value first, ask whether reduced paid-up status is available, and if the policy is large and no longer needed, find out whether it has secondary market value before letting it go.
Are the care cost figures on this page accurate for my area?
Treat them as national medians from published cost-of-care surveys, not local quotes. Regional variation is very large, and the same level of care can cost two or three times more in one state than another. Call two providers in your own county for current pricing, and check what your state Medicaid program covers.
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Related Reading
- What Is Cash Surrender Value
- What Is Life Expectancy Underwriting
- Living Longer Than The Life Expectancy Report
- How Much Is My Policy Worth
- What Is A Life Settlement
- Gul No Lapse Guarantee Risk
- Retirement Income Gap
- No Ltc Insurance Pay For Care
Pine Lake Legacy does not purchase life insurance policies and does not provide legal, tax, or investment advice. Information provided is for educational purposes only. Eligibility for any option, including life settlements, is not guaranteed and depends on individual circumstances, policy terms, underwriting, and market conditions. Consult independent legal, tax, or financial professionals before making decisions regarding a life insurance policy.