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Mortality Credits EXPLAINED
Very Few People GET THIS Concept
But If you can get it, you will
MOST CERTAINLY GET IT
(the annuity, that is)
It is NO SECRET that the income guarantees provided by insurance (annuity) companies exceed the guarantees provided by many other investment classes while at the same time being under the regulatory oversight of respective state insurance departments.
Such a combination of characteristics naturally make these instruments very interesting
to risk - averse consumers.
But How Do Insurers actually pull off these higher income benefits ?
Here is the answer:
By owning an insurance product, such as a life insurance policy or an annuity, it allows you to participate in what is known in the industry as the "risk pool"..... in this case, the particular risk is of receiving an "oversized" income payment but
never actually running out of income.
Everyone who owns an annuity is participating inside of an insurance company in the
"oversized income payment risk" as a member of the
so-called "risk-pool".
A "Risk Pool" is what is defined as a group of individuals (insureds) who have purchased financial protection from any financial loss stemming from any identifiable risk in life
(car crashes, house burning down, loss of physical health,
running out of money
There is a way that ONLY insurance companies can make this happen.
Your Insurer has, (as an example) thousands of other ANNUITY OWNERS, some receiving income, some not, and some of them (sadly) are going to be passing away PRIOR to their life expectancy.
And the Insurance Company already knows this !
How ?
Because they are
in the business of knowing this!
Insurance Companies know in advance how many human lives in a cohort of a population may pass away at various times thanks to their employed actuaries that actually tabulate these numbers on an ongoing basis.
As annuity owners pass away, they obviously will no longer be receiving the income benefits that they had been promised
(although their remaining annuity balances will usually go to their heirs, of course, and depending upon the terms of the contracts that they had chosen)
In these cases of premature deaths then - there are essentially "promises owed, but not yet paid" by the insurer, and so the unused payments can be "infused" (authors terminology here), into the calculations of the payments that are promised in writing to you, the other existing annuity owner (s).
This is essentially how insurance, as an industry, works, in fact. By sharing in the "risk of outliving your money", in this case, you get to participate in above - average income guarantees.
These are often referred to in the annuity business as
"Mortality Credits"
BUT HERE IS THE CAVEAT:
If you are not participating in the "risk - pool",
(ie, you have not paid a premium for the annuity),
then you do not receive these mortality credits !
How could you, right ?
After all, these benefits are for those that are actually sharing in the particular risk (and paying a premium) of running out of income.
If you do not share in this risk (pay a premium), you do not get to profit from it either.
Imagine this "shared risk" concept from other angles in the insurance world:
Imagine 2 houses within a city, 10 miles apart, burn down in the same day.
One homeowner had paid his property insurance premiums on time and was awarded $500,000 in replacement funds by the insurance company to rebuild his home.
He had shared in the risk pool, in this case, the risk being of potential damage or loss to his primary residence.
On the other hand, the second homeowner was in arrears with his insurance payments; in fact, he had blown the whole idea off of insurance -years earlier - thinking it "would never happen to him".
Consequently, the insurer had no record of the second homeowner being a participant (a payor of premium) in the risk pool of property protection and thus was not authorized to pay any claims.
The second homeowner had decided against joining the "risk-pool", ultimately, to his own peril.
This analogy with pretty much every form of insurance can be repeated...But for further discussion, check out the video below: