As with any new product, the increased marketing of longevity annuities will provide opportunities for advisors to deepen their relationships with clients by providing advice on whether or not the insurance offerings are appropriate for building retirement security.

Longevity annuities are a form of deferred annuity. Investors pay a lump sum in exchange for receiving monthly payments that start in the future, typically 10 or 15 years. The products continue to make monthly payments until the death of annuity owner. By doing so, the products eliminate the risk that retirees will outlive their savings.

In addition, they can potentially offer higher income streams than if an individual invested the lump sum in income-producing securities. That’s because insurance companies only have to make the payments to individuals who live long enough to begin receiving the payments. Those individuals who die before the start of the payments receive no benefits from the products.

Last year, the Treasury Department cleared the way for the products to be used with retirement accounts by specifying that assets used to purchase longevity annuities are not included when required minimum distributions are calculated. The regulations limit the amount that can be used for the annuities to $100,000 or 25% or retirement assets, whichever is smaller. That change in distributions requirements is appealing as it can help individuals reduce the amount of assets that they must withdraw from their retirement accounts, which of course can be a big benefit for tax planning.

The disadvantage, of course, is that investors who die prior to the start of the income payments receive no benefit from the products. Investors must also tie up a portion of their assets when they purchase the annuities. The guaranteed stream of income, furthermore, is subject to the financial health of the insurance company that is providing the product. Investors therefore face the risk that a financial collapse of an insurance company, which is unlikely, could render the provider of the annuity product unable to make the income payments.

For advisors, the increased popularity of longevity annuities will create challenges and opportunities. Indeed, advisors can strengthen their prospecting efforts and their existing client relationships by providing thoughtful analysis of the products and other options for generating income.

For example, if a client wants to invest $100,000 in a deferred annuity that will begin making income payments in 10 years, an advisor should illustrate how the same amount of money, when invested in different model portfolios, will increase in value and then how much in income the money will eventually generate.

In other words, will investing $100,000 for 10 years create a nest egg that will provide greater income than the annuity? A handful of variables must be considered. For example, a client may prefer the longevity insurance of an annuity, so the product may be appealing even if it is expected to generate less income than that of an investment program.

Clients may also shun the risks associated with investing assets in capital markets. Advisors should also assess the tax savings that can result from using longevity annuities to reduce the required minimum distributions mandated by many types of retirement programs.

Doing so, of course, can be complicated because it is hard to estimate what a client’s marginal tax rate will be in 10 or 15 years when the minimum distributions would have to be made.