The danger or possibility that a portfolio of an insurance firm, pension scheme or any annuity-paying institution will suffer a drainage of resources from life expectancy of those insured over covered being longer than expected. This risk arises when life expectancies (as reflected in actual survival rates) exceed expectations or pricing assumptions made at inception of coverage. Consequently, a firm experiences higher than expected cash outflows, which exposes it the risk of loss (financial loss) embodied in the additional costs that will be incurred over the longer lifespan.

In another different context, longevity risk refers to that risk on an individual (participant in a pension fund) when his/ her savings fall short of covering its life expectancy. In other words, this risk arises when expectations regarding lifespan do not live up to reality. It has two components: individual longevity risk and collective longevity risk. The former is the risk that a person will pass away either prior to or after his/ her average life expectancy. Generally, it can be mitigated by pooling risks in private annuity offerings, where those who outlive the average may be covered- for the remainder period- out of the contributions of those who pass away at an age lower than the average.

Collective longevity risk is the risk resulting from an underestimation of the average expected longevity. This risk cannot diversified by sharing it within members of the same pool by merely involving a large number of life insurance policies.