Everyone worries about outliving their savings. And as we live longer, the chances of doing just that are increasing.

Today, at least one in five baby boomers are expected to live in retirement for more than 30 years. But will they be able to pay for it?

"We're facing a huge problem with baby boomers who haven't saved enough for retirement and have instead put their money in joining health clubs and eating healthy," says Chris Cordaro, a fee-only financial planner in Chatham, N.J. "They'll live longer, yet they don't have enough for it."

Insurers in the past year have rolled out a new kind of product that aims to fill that need. It's a type of investment the industry refers to as "longevity insurance," which guarantees that you won't outlive your money.

These products aren't really insurance. With most, for one thing, your investment is lost if you die before the payouts begin. Longevity products are more like a mix of deferred and immediate annuities. Like a deferred annuity, you invest money now with the agreement to start receiving monthly payments later - say at age 85 - for the rest of your life. Like an immediate annuity, your projected income stream is calculated at the time you invest. The payouts are considerably higher than those of deferred annuities. But the costs can be high, too.

Currently, two large insurers, New York-based MetLife Inc. and Hartford, offer longevity products. New York Life Insurance Co. also has jumped into the marketplace, adding a longevity element to its immediate annuities that allows investors to increase the size of their payouts five-fold after a certain age or period of time.

When longevity products were introduced, some financial planners were critical because the investments, while similar to annuities, carried high commissions and lacked some of the flexibility traditional annuities offer, such as inflation protection and return-of-premium benefits, which let your heirs collect the premium when you die, minus any payouts already made. Insurers have since added some of these options. But such features add considerably to the cost, which leads critics to still question whether such products are worth the investment.

How it works

In its simplest form, the premise of longevity products is that by making a one-time payment, you will start receiving guaranteed lifetime income at a designated point in the future. Your projected income stream is calculated at the time that you invest.

The purchase doesn't have to be made at 60 or 65. Marketers of these products generally focus on those years because that's typically when investors have a good idea what kind of a retirement stash they're looking at, and how much longevity income they might need - or at least how much they can afford.

Compared with deferred annuities, longevity-product payouts are considerably higher. For example, if a 65-year-old man invested $10,000 in a deferred fixed-income annuity from MetLife, in 20 years he would start collecting $137 a month, assuming the investment grew at the minimum guaranteed rate of 3 percent. But if that man instead invested in MetLife's longevity product, his monthly payout would be $665.

Why such a big difference? For starters, because this particular investment, like most basic longevity products, offers no death benefit. If purchasers don't make it to 85, their investment is forfeited. And the majority of today's 65-year-olds may not live that long. The National Center for Health Statistics projects that a 65-year-old male will live, on average, to 82, and a 65-year-old woman to 85.

"The insurance companies rely on the fact that people aren't going to live that long to provide the payouts to the select few that will," says John Smith, a fee-only financial planner in Itasca.

Another risk is that of missed market opportunities. Because the amount of a longevity payout is determined when you make the initial investment - unlike a deferred annuity, which sets the payout amounts when the investment annuitizes - investors potentially miss out on market gains that may exceed the rate agreed to when the purchase was made. Purchasers of deferred annuities, by contrast, can receive bigger payouts if markets outperform expectations.

Longevity products are also quite pricey, partly because they are relatively new and competition is scarce. Commissions for agents who sell Hartford's products range from 5 to 7 percent - a significant load that cuts the size of your future payouts.

Flexibility, at a price

The high price of those new options, critics say, dilutes the original purpose of longevity products - to provide income protection at the lowest possible cost.

"A return-of-premium option might add 45 percent to 50 percent to the cost," says Chris Raham, a longevity expert with Ernst & Young.

Hartford, for its part, has added several options to its original Hartford Income Security: an inflation-protection feature, the ability to pay the premium over a 10-year period rather than a lump sum, a death benefit, and a facility-care benefit, which allows owners to start receiving income earlier if they need to enter an assisted-living facility.

In the basic version, with no extras, a 60-year-old male would pay $26,168 to start receiving $2,000 a month at 85. If he wanted to add a hedge against inflation, say a 3 percent increase each year after the payouts start, the premium would be $29,966. The basic plan with a return-of-premium benefit costs $34,937. And to purchase inflation protection and a return-of-premium benefit, the price jumps to $40,075.

A caveat from Cordaro: Because Hartford's inflation protection begins only when the monthly payouts start, the investor first has to watch inflation erode his planned payouts for 25 years.

John Diehl, president of Hartford's Retirement Solutions Group, says Hartford's inflation protection begins with the first payout because it's too difficult to project future inflation rates, and no one knows how long a buyer will actually live.

Expanding options

Whether you decide to invest in a longevity product or an annuity, the most valuable benefit of either may be what it allows you to do with the rest of your money. With a guaranteed income stream kicking in at a known date in the future, for instance, you can take a more aggressive approach with the rest of your portfolio. You can also make larger gifts to your heirs, and reduce your estate taxes.

"If you have income from age 85 on covered, you can give a lot more to your children and charity now," Cordaro says. Aside from the tax benefits, "you'll get to see your money put to good use."