Life Annuities: How Mortality Credits Can Help You
I used to say, “In the retirement income market, capital preservation is king.” And while there is still merit to that comment, the reality is that sustainability of income is actually more important than capital preservation.
Life annuities are discussed in detail in Chapter 6 as one of the income options for pensions. Here I’m focusing on a life annuity that is purchased later in life rather than at the more common retirement age. This is so that I can show you the positive impact of mortality credits, which come into play when life annuities are purchased at older ages. Just about everyone knows that as you get older, the premiums for life insurance get higher. While aging is not good when it comes to buying life insurance, the opposite is true when buying your life annuity, thanks to mortality credits. They meaningfully increase the amount of income that you can receive from an annuity (see tables 10.2
In fact, when you are in your late seventies, mortality credits become a more important factor when calculating annuity income than do prevailing interest rates. The mortality credit increases with age, thereby creating a higher amount of income for the same amount of capital. This also serves to hedge longevity risk. The resulting level of guaranteed income that can be created would be impossible to match in the broader financial markets. How significant is this in a time of extremely low interest rates? ...