Mortality Pool in a Mutual Fund

[Independent]

I pitched this idea 15 years ago when I was working, and I've tried it at least once on this board.

My former boss sent me this link https://www.wealthmanagement.com/retirement-planning/coming-soon-mortality-pool-40-act-fund

Coming Soon: A Mortality Pool in a '40 Act Fund

Stone Ridge is partnering with the Stanford Center on Longevity, as well as New York Life Insurance Co., which has a 30% market share in income annuities.

The description is a closed end mutual fund. This one appears targeted at higher end investors.

The idea is that the assets owned by the people who die are distributed to the people who survive. Unlike a classic tontine, the cash is distributed annually instead of being held for the last survivor.

The article doesn't give the mathematical details, but I'm sure they can be worked out. I don't think it needs to be closed-ended, but I can see the marketing advantage. It could allow any type of investment we normally see in mutual funds.

I'm bothered by the line "Annuities ... come with a lack of liquidity." It seems to me that this fund can only work with very limited liquidity -- otherwise people will bail when they become ill.

This is a transparent way of doing what annuities do behind the curtain. It eliminates the complaint that "when I die, the insurance company keeps the money".

 

[pb4uski]

.... It eliminates the complaint that "when I die, the insurance company keeps the money".

While it certainly seems like that to the annuitant that dies prematurely, it is wrong. The insurance company doesn't keep the money, the money goes to fund the benefits of other annuitants who live longer.

Back in my work days I was CAO of my employer's annuity line of business for many years and my work included analysis of sources of profits. Mortality for a large group of lives is very predictable... which we measured differences between actual and expected mortality the differences were always negligible and just static noise when looking at sources of profit. The main source of profit for payout annuities in interest spread... everything else was static.

 

[Big_Hitter]

very interesting - i'm interested!

 

[Big_Hitter]

The main source of profit for payout annuities in interest spread... everything else was static.

i'm puzzled why this isn't more widely understood

 

[Independent]

While it certainly seems like that to the annuitant that dies prematurely, it is wrong. The insurance company doesn't keep the money, the money goes to fund the benefits of other annuitants who live longer.

Back in my work days I was CAO of my employer's annuity line of business for many years and my work included analysis of sources of profits. Mortality for a large group of lives is very predictable... which we measured differences between actual and expected mortality the differences were always negligible and just static noise when looking at sources of profit. The main source of profit for payout annuities in interest spread... everything else was static.

Yep.

And, of course, attaching this to a mutual fund which passes investment gains through to the buyer, allows for lower loads to the insurer and better expected returns to the buyer.

 

[pb4uski]

i'm puzzled why this isn't more widely understood

Probably because interest spread is so easy to undertand and many people can't believe that there isn't some other complicated lever that the big, bad insurance company is pulling to screw them.