Longevity risk is the risk that an insured person or population lives longer than expected. This risk exposure can cause the longevity risk holder to lose money or make less of a profit.
An example of longevity risk in the primary market is defined benefit pension funds. The longer a pensioner lives, the more the pension fund will pay to that individual over time; potentially, this could be more than the pensioner contributed plus the earnings on those contributions.
An example of longevity risk in the secondary market is life settlements. The life settlement investor assumes responsibility for the premium payments for a life insurance policy; the longer the underlying insured lives, the more payments the life settlement investor makes and the longer they have to wait to collect the policy proceeds (i.e., death benefit).
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