Are guaranteed living benefits in a variable annuity a guarantee of a longer life? According to a recent study by Ruark Consulting, LLC, it appears so.
Ruark found that people who purchase variable annuities (VAs) with guaranteed living benefits GMIBs, GLWBs and GMWBslive longer than those who don’t buy those riders. In fact, mortality was about 12 percent lower on VA contracts with those guaranteed living benefit clauses than those without such riders, confirmed Peter Gourley, below right, vice president at Simsbury, Conn.-based Ruark, an actuarial consulting firm.
Why that is so is due to a consumer’s perception of his or her lifespan. Say a person has an idea he or she may live a long life, then spending the extra money for that guaranteed lifetime income would make sense, Gourley explained. Conversely, “you are probably not going to buy one if you have some prior knowledge that your longevity might be impaired somehow,” he said.
For the insurance company, lower mortality on VA policies with guaranteed living benefits is good news/bad news, Gourley said. Good news in the sense that a contract is in force longer and therefore, the insurer can collect fees on it for an extended time period. The bad news? Making good on payouts longer than the insurer may have projected.
Yet insurers can mitigate that risk by pricing the annuity contract properly with the right expectations about longevity. “Insurers should probably assume that longevity will be better on these people [who buy the guaranteed living benefits]. So they build that into their price and they won’t have an unpleasant surprise,” Gourley said.
Another unpleasant surprise could come from insurers using the standard industry mortality tables, such as 94MGDB or Annuity2000, to discern mortality rates in VA contracts. The mortality experience for policyholders with guaranteed living benefits embedded in a VA contract is much different than the general population, Gourley noted.