Annuity Mortality Risk
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Annuity Mortality Risk
The most important feature of any annuity is the guarantee that it can pay you an income you cannot outlive. However, this guarantee presents another type of risk. Mortality risk—the risk associated with the "payments for life" feature of annuities—is actually something of a double-edged sword, in that it can affect both the annuitant and the insurance company. When you annuitize money accumulated within an annuity, you actually pay the account value to the insurance company in exchange for the insurance company’s promise to pay you income for the remainder of your life (assuming you select such an option).
Things To Know
- If you die sooner than expected, you may be the victim of mortality risk.
How the risk works
The insurance company calculates the amount of your "payments for life" using the value of the account and actuarial statistics, in order to estimate your average life expectancy. If you die sooner than expected, the company may have paid you less than the amount you paid to them. In that case, you are the victim of mortality risk. By contrast, if you outlive your actuarial life expectancy, the company falls prey to mortality risk, because it has promised you "payments for life" and it must fulfill that promise.
