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Mortality Yield

With a participating annuity, premiums paid by those who die earlier than expected contribute to gains of the overall pool and provide a higher yield to survivors than could be achieved through individual investments outside of the pool. The mortality yield increases significantly with age, often creating a return that would be impossible to match in the broader financial markets.

Calculating the Extra Yield Provided by a Life Annuity

A common question is how annuities compare to other financial products that seem similar such as bonds, certificates of deposit (CD) and money market funds.  After all, each of these products promises to provide some type of fixed return in exchange for your investment. 

Looking at a simple life annuity can help answer this question and may also highlight what makes the life annuities unique among all financial products. 

Why Low Interest Rates Have a Silver Lining

As discussed in a recent post, ultra low interest rates are an enormous burden for retirees.  Low interest rates make it difficult to produce reasonable levels of yield and increase the present value of future liabilities (retirement spending is a liability).

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Money Magazine on Immediate Annuities

There is a good article on the use of immediate annuities by Walter Updegrave who is a senior editor at Money Magazine.

The article discusses how to think about an immediate annuity in light of other guaranteed payments from Social Security or a pension plan.

Laddering of annuity purchases is discussed.

Age and timing of an annuity purchase is addressed, as is the concept of the mortality yield or mortality credit.

Source: Money Magazine

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