One of the risks faced by retirees in the defined contribution (DC) systems, is survival beyond the age indicated in the life expectancy tables. This is what is known as individual longevity risk, which is assumed by individuals with lower pensions in the programmed withdrawal (PW) mode, or by the life insurance companies when individuals retire in the life annuity (LA) mode. Estimates in the case of Chile indicate that 31% of individuals enrolled in the individually-funded system will outlive their savings once the system matures. This reality therefore makes it desirable to seek mechanisms for establishing a longevity insurance that would cover the risk of outliving one’s savings.

This Note analyzes the creation of a longevity insurance, that basically involves a fixed monthly payment protected from inflation, if the individual is still alive after a certain age (the insurance ceases payments when the individual dies). This insurance is financed by individuals who live less than the average for their age group, and assigns these resources to covering the financial deficit of individuals who live longer than the average.

The longevity insurance would be paid throughout the active lives of workers, and would cover pensions after a certain advanced age (85, for example), through the purchase of a deferred life annuity on retirement.

Among other benefits, this insurance enables increasing pensions under any of the two traditional pension modes (PW and LA) at the official retirement age. This increase is due to the fact that the greater longevity period is financed with this insurance. In Chile, increases in the initial pension ranging from 12,5% in the case of LA for men, and 25.6% in the case of PW for women, have been observed.