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Mortality Credit on Deferred Annuity
Old 11-09-2012, 09:22 AM   #1
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Mortality Credit on Deferred Annuity

Annuites again (sigh). I am looking into purchasing a Fixed Deferred Annuity (7 or so years in length) in order to obtain some mortaility credit to supplement the low interest in this market. I called Vanguard's Annuity Dep't (annuity agent never heard of 'mortality credit'), and am looking around online. My initial feeling is that the mortality credit doesn't seem to exist in such an annuity. What am I missing? Thanks all.
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Old 11-09-2012, 10:15 AM   #2
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Originally Posted by Richard4444 View Post
Annuites again (sigh). I am looking into purchasing a Fixed Deferred Annuity (7 or so years in length) in order to obtain some mortaility credit to supplement the low interest in this market. I called Vanguard's Annuity Dep't (annuity agent never heard of 'mortality credit'), and am looking around online. My initial feeling is that the mortality credit doesn't seem to exist in such an annuity. What am I missing? Thanks all.
Don't they usually have a "return your premium" feature? Unlike a life annuity in which you forfeit investment when you die, if people who die during the 7 years get back what they paid, there isn't much a source of funds to credit those who lived.
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Old 11-09-2012, 10:29 AM   #3
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if people who die during the 7 years get back what they paid
You found a way to take it with you
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Old 11-09-2012, 10:34 AM   #4
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Mortality credit is part of the pricing of the annuity, not something explicit that a sales person can point to. If you live longer than the average purchaser, you would be receiving some of the mortality credit. If you live less than expected, you financed a mortality credit to other purchasers. This is a function of any annuity product that offers a "lifetime" benefit. Just pick the annuity that gives you the best return.
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Old 11-09-2012, 11:54 AM   #5
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Mortality credit is part of the pricing of the annuity, not something explicit that a sales person can point to. If you live longer than the average purchaser, you would be receiving some of the mortality credit. If you live less than expected, you financed a mortality credit to other purchasers. This is a function of any annuity product that offers a "lifetime" benefit. Just pick the annuity that gives you the best return.
+1 the premium reflects the contractual benefit, mortality and interest so the "mortality credit" is bundled in the premium and can't be separately identified unless you had the insurer's pricing model.
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Old 11-09-2012, 02:11 PM   #6
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Got it ! Thanks for clearing that up for me - much appreciated !! Rich
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Old 11-09-2012, 06:21 PM   #7
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I bought some deferred annuities this year. I am 47. My understanding is that mortality credits are included in the quote they give you.

I am planning to buy $15k-20kworth of deferred annuities every year over the next 15 years, until I turn 62 (so that they do not exceed the $200k-300k limit). In this way, I am taking my own mortality into account.

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Originally Posted by Richard4444 View Post
Annuites again (sigh). I am looking into purchasing a Fixed Deferred Annuity (7 or so years in length) in order to obtain some mortaility credit to supplement the low interest in this market. I called Vanguard's Annuity Dep't (annuity agent never heard of 'mortality credit'), and am looking around online. My initial feeling is that the mortality credit doesn't seem to exist in such an annuity. What am I missing? Thanks all.
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Old 11-10-2012, 07:32 AM   #8
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I am planning to buy $15k-20kworth of deferred annuities every year over the next 15 years, until I turn 62. In this way, I am taking my own mortality into account.
I am 62. I would make a bet with an insurance company that I will live 7 or 10 years before I use 'that bucket of money' in return for a guaranteed higher return (which I assume comes from the mortality piece).
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Old 11-10-2012, 08:24 AM   #9
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I think you can get a sense for the age that you would need to attain to benefit from a SPIA be calculating the number of periods where the PV of the SPIA payments would equal the premium using the interest rate for a period certain annuity that approximates your mortality.

For example, for a 57 yo in my state, the premiums for a single life male, single life female, joint life and 25 year certain annuity would be as shown in the table below according to immediate annuities.com. The IRR implicit in the 25 year payout annuity is 2.96%. If I assume that is the interest rate that the insurer uses for annuities of that general term, I can calculate the number of periods implicit in the premiums for the other annuities, add 57 and get the age at which I need to live to gain from the mortality credit. If I die prior to that age then the insurer comes out ahead, if I outlive that age then I come out ahead (in both cases assuming that 2.96% is a reasonable interest rate assumption for an annuity that will last ~25 years on average).

I think this makes sense. Thoughts?


 PremiumBEP
Single life male 217,014 82.9
Single life female 228,352 85.0
Joint life 240,371 87.4
25 year 211,864 82.0
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Old 11-10-2012, 10:11 AM   #10
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For example, for a 57 yo in my state, the premiums for a single life male, single life female, joint life and 25 year certain annuity would be as shown in the table below according to immediate annuities.com. The IRR implicit in the 25 year payout annuity is 2.96%. If I assume that is the interest rate that the insurer uses for annuities of that general term, I can calculate the number of periods implicit in the premiums for the other annuities, add 57 and get the age at which I need to live to gain from the mortality credit. If I die prior to that age then the insurer comes out ahead, if I outlive that age then I come out ahead (in both cases assuming that 2.96% is a reasonable interest rate assumption for an annuity that will last ~25 years on average).

I think this makes sense. Thoughts?
"If I die prior to that age then the insurer comes out ahead"

Not really, if you study the details of the contract. If it is for a defined term, and you opt for the residual being passed on to another (or your estate), that's not the case.

I just bring this up since so many people have the idea that if you die and have an SPIA, the remainder goes to the insurance company. That is only a fact if you chose to take that option (to maximize your monthly payout/income), but in reality - as in all insurance products, you make the decisions to both provide current income, along with distribution of the remainder if you pass at an earlier age than expected.

For instance, in early/mid-2007 I contracted for an SPIA for life, along with a rider for a guaranteed period, along with my DW as getting payments (at 100%) if I passed earlier than expected. I/we also opted for 100% payments to our estate if we both passed before the estimated joint life period (28 years, at contract execution). And if one/both lives longer than that calculated 28 years? Payments continue - at 100%, until we're both gone.

It's simple to calculate a rate (regardless of what is shown on any site), by creating an IRR (not XIRR) worksheet, using the preimum, monthly payout, guaranteed period, and extended non-guaranteed period (for us, calculated to age 100), to see what your actual return is.

In our case, our contract is providing a return (for the 28 year guaranteed period) of just under 5%. If we would have gone for a policy that would not have a guaranteed period, no coverage of spouse, and no payments to our estate if we passed earlier than calculate lifespan, we would have received close to a +1% "bump" in return, and a much greater monthly payout.

Is it worth that 1%? Only the contract holder (you) can make that decision. Just a small point; if either/both continue to live and receive monthly benefits after the calculated joint lifespan, the actual IRR (return) will increase overall. Heck, it might even get to 6% if we live long enough.

That's the exercise that I/we went through over five years ago when we executed our contract, to compute the various quotes we received, along with the defined options (not all insurance companies provide the same available benefits) in order to provide us information to make an informed decision on the product.

You can't just look at one web site and see what the current payout is. You need to compare policies/companies, on options that you requrire.

Any other comparision is just "spitting in the wind", IMHO.

As far as your comment, "2.96% is a reasonable interest rate assumption for an annuity that will last ~25 years on average"?
That's a personal call. If your retirement income plan can work with the income generated (regardless of perceived rate of return)? IMHO, that's all that counts. Heck, those folks that still have their WIN (whip inflation, now) buttons from decades ago would think that I/DW would be satisified with a 5% return rate are crazy. Of course, back in those days, CD's were paying 20% - and mortgages/notes for homes were just above those rates.

It dosen't matter what the world is doing. It does matter that you are able to keep your head above water, regardless...

Well, you did ask for our thoughts on the matter ...
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Old 11-10-2012, 11:15 AM   #11
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You seem to be reading and misinterpreting a lot into my short post.

Since I was referring to a life annuity, the "if I die prior to that age the insurer comes out ahead" is correct. If you add a minimum period certain to the life annuity as you have done, then it complicates the analysis.

I didn't state that 2.96% was a reasonable rate as you imply by selective quoting - I actually don't have a view on that - I said that the conclusion with respect to the "break-even" age for the life annuities was reasonable assuming that the 2.96% was reasonable (which it should be since the only unknown assumption of the period certain annuity is the interest rate and it can be derived from the payment, premium and term). In other words, the 2.96% crediting rate is what the insurer feels it can pay and that crediting rate wouldn't be much different for a 25 year period certain or a life contingent contract with an expected term of 25 years. It that is the case, then the remaining difference in premium must be principally attributable to mortality.
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Old 11-12-2012, 10:04 PM   #12
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Annuites again (sigh). I am looking into purchasing a Fixed Deferred Annuity (7 or so years in length) in order to obtain some mortaility credit to supplement the low interest in this market. I called Vanguard's Annuity Dep't (annuity agent never heard of 'mortality credit'), and am looking around online. My initial feeling is that the mortality credit doesn't seem to exist in such an annuity. What am I missing? Thanks all.
The "mortality credit" concept requires that the assets of the other buyers in your group are distributed (usually not transparently) to the survivors. To make this happen, the deferred annuity must have zero death benefit.

I'll bet the product that you're looking at guarantees a death benefit, probably the greater of the premium or the account value. So there is no "mortality credit", hidden or otherwise.

The only company I know of that's selling a deferred, zero death benefit annuity is MetLife. They refer to it informally as "longevity insurance".
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