Mortality Credits are the New Alpha of Retirement Income
The low interest rate environment affects all financial products that use government debt. Banking institutions, mutual funds and insurance companies are all subject to the whims of the Fed to raise or lower interest rates. But key components of guaranteed lifetime income annuities are mortality credits, which not only are the insurance industry’s secret sauce, but they are also recognized as the new retirement alpha.
The insurance industry at-large purchases investment-grade government bonds. So all carriers are fishing out of the same government debenture pool. To the causal observer, it seems odd there’s such a difference in annuity payouts from one company to another. But that difference can be distilled down to one component: mortality credits. Every insurance company has differing experiences in death claims for life insurance policyholders and lifetime annuitants.
To understand mortality products like guaranteed lifetime income annuities and life insurance, you need to comprehend the law of large numbers. The insurance industry has trillions of dollars in life insurance in force. If everyone died within a tight time frame, the industry would collapse. But the death-claim experience in America is very low, thus the law of large numbers creates the favorable conditions for insurance companies to offer protection and maintain itself as a profitable entity.
With guaranteed lifetime annuity products, the other side of the mortality balance sheet uses the law of large numbers, as well factoring how long the company will pay out monthly benefits. This may be an over simplification, but if the average female annuitant lives to age 89, that means half of them will die before age 89 and half of them will die after age 89. The odds makers, known as actuaries, can assign credits based on their insurance company’s mortality experiences. So a guaranteed lifetime annuity payout is comprised of principal return, interest earned and company assigned mortality credits. Watch the interview on guaranteed lifetime income annuities with Tom Hegna, popular platform speaker, retirement specialist and best-selling author. Tom has two retirement books entitled Don’t Worry, Retire Happy and Paychecks and Playchecks. Tom has also hosted the PBS Special, “Don’t Worry, Retire Happy.”
Guaranteed lifetime income annuities can impact an overall portfolio performance and take key retirement risks off the table, like living too long and the sequence of returns during retirement distributions. But the real advantage to retirees is guaranteed income they can’t out live.
Nationally syndicated financial columnist Steve Savant interviews Tom Hegna, popular platform speaker, retirement expert and best selling author. Tom has two retirement books entitled Don’t Worry Retire Happy and Paychecks and Playchecks. Tom has also hosted the PBS Special, Don’t Worry Retire Happy.