By Warren S. Hersch
New York City – If there's one concept absolutely not to overlook when talking about life income annuity features with a prospect, it is the product's mortality credits–i.e., the reallocation of contributions of those who die to those who survive.
That was a key message of Tom Hegna, a chartered financial consultant and vice president of New York Life, New York, during a meeting here.
"The reason you buy a lifetime income annuity is to get paid mortality credits–and all lifetime income annuities offer them," he said at the March 2009 Boomertirement Road Show.
"The older you are, and the longer you live, the more mortality credits you get paid. You also get paid more mortality credits when you place fewer guarantees on the contract, such as a cash refund rider or guaranteed death benefit."
Hegna related a hypothetical scenario involving 5 women, each 90 years old, who agreed to share evenly, in each of 5 successive years, $500 placed in a box for their benefit. In the second year, one of the 5 women dies, leaving the remaining 4 with $125, a 25% gain over their original allotment. In the 3rd year, a second dies, increasing the total $167 each, a 67% return. With each additional death in subsequent years, the amount apportioned to surviving women increases in like fashion.
Likewise, Hegna observed, annuity manufacturers can offer progressively higher interest rates on their products as clients age. The example he used showed individuals age 65, 75 and 85 receiving payouts of 8%, 10% and 16%, respectively. They can do this precisely because of these mortality credits, a feature not available on alternate financial products.
How much of the client's money should go into a lifetime income annuity? The "mathematically and scientifically correct" answer, said Hegna, is an amount that will at least cover basic expenses.
But he also noted that clients cannot optimize retirement income using the balance of their investable assets without rounding out the portfolio (including bonds, cash and various classes of mutual funds) with a second lifetime income annuity.
Without a life income annuity, the only way to optimize income in retirement is to know the day the client will die. Though that's not possible on an individual basis, Hegna said insurers can determine when, on average, a pool of individuals will die, thereby enabling the carriers to pay as though they knew when each person within the pool would die.
Annuities can be especially attractive to conservative investors during the current economic downturn, the executive pointed out. That's because the products allow policyowners to recoup losses they may have suffered in the equities markets, he indicated.
To illustrate, he related a real case involving a husband and wife, each 75 years old, whose brokerage account had declined to $300,000 from $650,000 within 9 months.
The couple subsequently closed the account; and, after weighing the merits of reinvesting in a CD, which would have yield a 3% annual return and a payout of $9,000 per year, they purchased a joint-life with 30-year period certain income annuity. Result: The couple's income increased to $22,000 annually for the duration of each of their lives. Should they have died immediately after the purchase, the guaranteed death benefit to beneficiaries would have totaled $663,000–exceeding by $13,000 the starting balance in the brokerage account.
