How Mortality Credits Make Income Annuities Work

You would be hard pressed to find someone who doesn’t want guaranteed lifetime income. But there are not very many places to find this type of a guarantee. Lucky workers have a pension that will continue to pay them income even after they are no longer working. While Social Security pays income for life, most people won’t receive enough income to cover all of their expenses throughout retirement. This is where annuity products are beneficial. They are the only other products that pay guaranteed income for the rest of your life after a lump sum payment to an insurance company. In The Cincinnati Enquirer article “Insurance: How to guarantee income for life,” J. Brendan Ryan discussed the importance of income annuities.

The author is a big proponent of income annuity products. An annuity is purchased with a lump sum of money. In exchange for this payment, either one person or a couple will receive monthly or quarterly income for as long as they live. The government has also had a positive view of income annuities in recent years. New York Life performed a survey that found that 90% of retirees think younger generations should set up some type of income plan similar to a pension. If you don’t have a company pension, an income annuity is the way to set up such an income plan. Many people don’t understand how an annuity works, so the article’s author explained how an insurance company is able to promise lifetime income.

Your annuity guarantees are based off of mortality tables. These mortality tables estimate the life expectancy of people at every age. Mortality tables are changing this year, which will effect annuity rates, consumers and insurance companies. Since some people die sooner than the mortality tables predict and some die later, insurance companies are able able to hedge their risk with something called mortality credits. Mortality credits are created when people die sooner than expected and don’t receive as many income payments as they would have if they had lived their full life expectancy. That money goes into a pool that will then pay lifetime income to those people who live longer than their life expectancy.

Some people argue that annuities are bad because of the risk that you’ll die sooner than your life expectancy dictates and then your money becomes a mortality credit. But you can add protections to your annuity product in a few different ways. The author said that the most common option he sees chosen with income annuity products is the “life with 10 years certain” option. This guarantees that your heirs will receive your annuity payments for 10 years, even if you die within 10 years of purchasing your annuity. You can also add this type of guarantee to a joint life annuity so that your heirs receive payments for 10 years if both annuitants die before then. The period certain term can be in other increments of 5 years, but not typically any higher than 30 years. Keep in mind that the longer the term, the more it costs. This means that your monthly payments will be lower overall.

Income annuities pay lifetime income to one or two people based off of mortality tables. They are one of the only ways to create your own lifetime income stream. You can add guarantees that will allow your heirs to receive death benefits for a certain period of time in addition to your income guarantees.

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