ALDA is short for Advanced Life Deferred Annuity, also known as longevity insurance. An ALDA is basically a long term deferred annuity that doesn’t pay out until you reach an advanced age. How advanced? Think 75, 80 or 85. The longer you wait before you start taking payments, the more you will receive on a monthly or quarterly basis. You might be thinking that that is a long time to live, but statistics show that it’s really not. For example, married couples who are in good health when they reach 60 years of age can expect that at least one of them may live to be 90. That’s right; you or your spouse might live to an advanced age. The question is, are you prepared financially to live that long? However long you think you might live, or have planned to live, you should add at least 5 years. That is what an Advanced Life Deferred Annuity is all about – self-insurance for living a long time (plus there are some other interesting features we’ll point out to you).
You might be thinking to yourself “I have a lifetime income annuity that will protect my spouse and me until we both die, why buy an Advanced Life Deferred Annuity?” This is a good, valid question. You might not need one. But consider a different scenario: It has been suggested that the number one problem the aged might face is “dying too expensively.” The main problem with living a long time is that it becomes statistically likely that you are going to need extensive medical help in your last years, and that can be extremely expensive. Depending on your retirement plan, you could run out of money or live in near poverty because you simple cannot afford to do all of the things you want to do because your funds are going to long-term care. Hopefully you have had the foresight to plan for such an eventuality; you have a well-balanced financial plan that has some of your money in stocks, bonds and mutual funds. Some of your money should go to both life and long-term care insurance, and some of your retirement funds should go to an annuity that guarantees lifetime income (supplemented with Social Security). If you have covered all of these bases you might be fine; at least you’ll be able to pay your bills, but what about the quality of life question? Long-term care insurance is expensive and is by no means complete. You might even be funding your insurance policies (see article about using annuities to pay for life insurance in an upcoming article) with your annuity payments or you could have a separate annuity just to pay for life and health insurance. However you have structured your retirement, even if you have done well and are mostly covered, wouldn’t it be nice to have insurance against loss of income in your final years? This is where an Advanced Life Deferred Annuity can be exceptionally helpful.
The easiest way to think about ALDA’s is to compare them to fire, home or flood insurance. You hope you never need it, but you’re glad you have it when the worst happens. In its most basic form, an Advanced Life Deferred Annuity may seem like a poor investment because there are no guarantees that you will actually live long enough to collect. If you and/or your spouse die before the Advanced Life Deferred Annuity kicks in, the money is forfeited to the insurance company. This is the most basic (and least expensive) form of an ALDA – consider it like a whole home insurance policy except in this case you actually get your money back and more if you do reach the age when the Advanced Life Deferred Annuity starts distributing funds. The basic Advanced Life Deferred Annuity is really most suitable for individuals or couples who don’t have anyone to leave their money to, or who have provided for their heirs in other ways. The good bit about a basic ALDA is that they are inexpensive to purchase and provide a high pay-out when you reach the age, or “start-point” of your Advanced Life Deferred Annuity. For example, a couple that makes a single premium payment of $24,000.00 (after tax dollars) at age 60 could easily generate $1000.00 per month for the policy holder starting at age 85 and continue for life. The reason the insurance companies can do this is simply expressed: many Advanced Life Deferred Annuity policy holders will not live long enough to collect and their forfeited funds go to pay those who do live long enough to collect.
I know what you’re thinking. “why would I risk $24,000.00 that I might not benefit from?” While it is true that the least expensive forms of Advanced Life Deferred Annuities carry no guarantees, most of the (few) Insurance Carriers that do offer Advanced Life Deferred Annuities also offer them with some form of guarantee. Primarily there are three options or riders that are offered: Cash Refund, Death Benefit and some ALDA contracts allow you to access a portion of your income early if you are forced into a nursing home. With a Cash Refund rider your beneficiaries will receive whatever is left from the initial amount you put into the contract should you die after the start date has begun and you start receiving funds. The Death Benefit comes into effect if you die before the Advanced Life Deferred Annuity was scheduled to start, you beneficiaries will get –generally speaking- at least the amount you put into the contract, and sometimes a little more expressed as a small amount of interest for each year the insurance company has had your money.
Now that we understand that we can structure our Advanced Life Deferred Annuity so that we aren’t going to forfeit the money we put into it, let’s take a moment and discuss how one might implement an Advanced Life Deferred Annuity into a typical retirement plan. At age 60 you have accumulated approximately $500,000 in a combination of accounts – An IRA or 401k holding ¾ of that amount, and the rest in after tax savings that have grown in an investment portfolio. Let’s say you are conservative and you put $375,000 into a 10 year deferred fixed annuity that you plan to annuitize when you retire at age 70. If you take the lifetime income option you will probably be looking at $2000 per month for life. However, if you were to take a 20 year distribution instead of lifetime income and put enough into an Advanced Life Deferred Annuity that starts at age 80 you would make more income overall and certainly much more during the period between ages of 70 and 80 because a period certain annuity pays more than a lifetime income annuity does. (This is because the insurance company doesn’t have to gamble on the fact that you will live a long time and cost them money.) Essentially, you can spend more money and have more fun in your retirement, with greater funding available to you during your prime retirement years and without worrying about running out of money because the ALDA kicks in at age 80 and can be structured to provide the same amount. Simply put, it’s an option that can allow you to maximize your retirement money and the only risk you face is that the insurance company will fail. This is highly unlikely, but you should consider the stability of the companies you are thinking of investing in. While all of our numbers here are made up, they are not unrealistic. If you are considering an Advanced Life Deferred Annuity, check with your trusted financial advisor and see if this is an option that could work for you.