From the July 2009 issue of Boomer Market Advisor • Subscribe!

Give mortality some credit

The topic of income annuities always reminds me of the Uruguayan soccer team whose plane crashed in the Chilean Andes back in the '70s. If you recall, the players who weren't killed on impact avoided starvation by, well, turning to the remains of their less fortunate teammates.

Why the bizarre association? Just as the survivors of the Andes crash were nourished by the victims, the incomes of surviving annuity owners are actuarially enhanced by the assets of the ones who die. Those enhancements are known in the annuity biz as "mortality credits."

I submit that some of your clients will find the thought of forfeiting their wealth to strangers as repulsive as what happened to those soccer players. They will never buy an income annuity from you. But others will think that mortality credits are a brilliant idea. In that case, you may have a few customers.

Statistically, the second category of clients is the smaller. In any given year, only a handful of people buy income annuities, or single premium immediate annuities. Most people - even those who buy lottery tickets - regard SPIAs as a bad bet.

Those folks expect to be run over by a bus shortly after buying an annuity. Or they're convinced - inaccurately - that their money will go to an insurance company at death instead of to their children. Some just don't like to discuss their own mortality.

When clients feel that way about annuities, no amount of reasoning or salesmanship will make them change their minds.

But some clients (the non-smokers with long-lived parents, typically) will be receptive to life annuities. To them, the dividends of mortality pooling - the basis of pensions and Social Security - will sound like free money. As for forfeiting the balance when they (and their spouses, in a joint contract) die, they don't care because they won't be here.

The sheer efficiency of SPIAs will appeal to this type of person. They will delight in learning that a SPIA pays out about 8 percent a year in retirement, or double the income from a classic systematic withdrawal program. And any fears they might have about getting hit by a bus can be defused by offering a life contract with a 10-year period certain.

Given today's financial anxieties, this type of client may soon be easier to find. When stock prices soar, annuities are as tough to sell as umbrellas on a sunny day. But with the halving of the Dow last fall, more near-retirees may see the appeal of guaranteed income solutions.

Advisors who've never thought much about selling SPIAs - the 4 percent commission and/or the idea of losing manageable assets don't exactly set the world of intermediaries aflame - might want to give them another look. The latest contracts have new liquidity features, and planners have created some interesting strategies for laddering them.

But don't waste your time pitching annuities to people who recoil at the very thought of profiting from someone else's demise - or, conversely, of someone profiting from theirs.

Kerry Pechter is the author of "Annuities for Dummies" and editor of

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