The Hidden Benefit in Annuities
Annuity sales are soaring, but still only a minority of retirees own them. About half the people who purchase annuities will pass away before the average life expectancy. Those people will receive less lifetime income than expected at the time they purchased the annuities. When the insurer calculates the income it will pay each annuitant, it doesn't assume it will keep all the extra money from those who pass before life expectancy. Instead, the insurer knows this will happen and plans to pay that money to the other annuity owners. This extra money is known as the mortality credits, and it enables the insurer to promise to pay its annuity owners more than it would be able to pay from investment returns alone. Mortality credits are why a single premium immediate annuity or a deferred income annuity will pay higher guaranteed income than a bond or other safe income investment. They allow annuities to be competitive with other ways retirees could position their nest eggs. Mortality credits are one reason why surveys indicate retirees with annuities generally spend more in retirement, and spend with more confidence, than many other retirees.
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