If there were no risk of running out of money, retirement income planning would be a straightforward affair: Save a certain amount and then spend it until you die. There would be no need for Monte Carlo simulations or great debates about the optimal withdrawal rate that both maximizes income and minimizes risk. But as any advisor who has tried to make this calculus work knows, income distribution is anything but simple.

The biggest challenge is getting a grip on just how long a period to plan for. Will retirement last 20 years? Or will it be 30-or even 40 years? Each of these time frames requires a different plan, yet a retirement income strategy calls for keeping all these periods in mind simultaneously-so that retirees have enough money to make it to the final stretch, without having to scrimp unnecessarily during the early years.

One way to bring some certainty to the equation is longevity insurance. Offered only since 2005, the product can protect against living a very, very long time by providing income at the tail end of retirement.

UNDER THE HOOD

Longevity insurance is a combination of an immediate and a deferred annuity, known as a single-payment deferred annuity. As with an immediate annuity, the premiums are generally paid in one lump sum. This is typically done at around age 65. But similar to a deferred annuity, payments don't begin until some point in the future, usually at age 85. Women receive a smaller amount of income from these annuities because of their longer life expectancies.

In its simplest form, longevity insurance offers a retiree something other income distribution schemes don't: the availability of assets late in life. That's the time when nest eggs are close to depletion or seriously drawn down. "It's not as if at age 85 you can tell your client to go get a job because they don't have enough money for retirement," says John Diehl, president of The Hartford's retirement solutions group. "As we age, our options become more limited."

Longevity insurance can also be used to preserve a policyholder's estate later in life. As medical expenses are sure to build up in the late years of retirement, a policyholder can use the income the longevity insurance provides to pay for medical bills and prescriptions while preserving his or her estate.

Many academics have taken to the idea of longevity insurance, as an innovative new option in the ongoing pursuit of retirement income. "If you live long enough, it could turn out to be the best fixed-income investment you've ever made," says Michael Kitces, director of research at Pinnacle Advisory Group in Columbia, Md.

That depends on how long the policyholder lives, though. After all, policyholders who die before the trigger date lose their entire investment. But while these policyholders never receive a return on their investment, they subsidize the income of those still living. Living just two years beyond the annuitization date would allow the annuity holder to recoup his initial investment. Those who live into their nineties do even better.

IT CAN BE CHEAPER, TOO

It takes a substantially smaller amount of money to fund later retirement with longevity insurance than other options, Jason Scott, managing director of Financial Engines' Retirement Research Center, found in a recent report. "You could set aside the money to self-insure against longevity yourself," Scott explains. "But it would only cost you about half as much to buy an immediate annuity at age 85, and just half of that to buy the longevity insurance at age 65 to kick in at age 85."

Here's an example of Scott's calculation using real dollar amounts: Your client could keep an additional $100,000 in reserve for late-life income needs, or he could spend $50,000 on an immediate annuity when he reaches 85. Or, he could commit $25,000 to longevity insurance at age 65 for income needs beyond age 85.

INSURANCE FOR HEALTH NUTS

Clearly, longevity insurance doesn't end up being profitable for people who live only a normal life expectancy. At age 65, only half of an insurance pool is expected to live to 85.

For that reason, consumers and their advisors have been lukewarm toward the product. Even insurance agents aren't pushing it, and longevity insurance sales are said by most industry analysts to be "sluggish" at best. "My clients are really reluctant to take a chunk of money and give it to an insurance company for 20 years," says Steve Podnos, a certified financial planner in Merritt Island, Fla. "If you die, you lose that money."