VANCOUVER — Financial professionals should be sure to remind lifetime income annuity prospects about the value of the product’s mortality credits, Tom Hegna said here at the Million Dollar Round Table annual meeting.
Hegna, a vice president at New York Life Insurance Company, New York, who holds the Chartered Financial Consultant professional designation, was one of the experts who spoke Tuesday during the main platform session.
MDRT, Park Ridge, Ill., says the meeting has attracted a total of more than 6,000 attendees.
A mortality credit is a mechanism for reallocating the annuity contributions of holders who die to those who survive.
“The reason you buy a lifetime income annuity is to get paid mortality credits–and all lifetime income annuities offer them,” Hegna said. “The older you are, and the longer you live, the more mortality credits you get paid.”
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 third 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 providers 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 7%, 9% and 14%, 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 added 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.