Explaining Mortality Credits to Clients

[Justin Bilyj]

Perusing the forum I've found four threads, all by Steve Savant, that talk about mortality credits for annuities:

• http://www.insurance-forums.net/for...ality-credits-retirement-planning-t41961.html
  
• http://www.insurance-forums.net/for...lity-credits-new-retirement-alpha-t60638.html

Here's two for indexed life insurance:

• http://www.insurance-forums.net/for...niversal-life-mortality-mechanics-t48433.html
  
• http://www.insurance-forums.net/for...y-mechanics-improve-your-practice-t64557.html

Just wondering IF and HOW others here position this complex topic to sell more annuities (and life insurance) to prospects and clients. Appreciate any replies!

 

[DHK]

Mortality or longevity credits is all about how an insurance company can afford to make lifetime income guarantees and still be in business & profitable.

 

[Justin Bilyj]

Mortality or longevity credits is all about how an insurance company can afford to make lifetime income guarantees and still be in business & profitable.

www.youtube.com/watch?v=EQmrgsamGIc

That's a fine explanation, but do you think that suffices from a prospect/client's perspective of explaining it?

(I saw the same software on display from Steve's videos above, Tom Hegna was using it.)

 

[DHK]

In order to explain mortality credits, you have to realize that income benefits are simply an income calculation regardless of interest credits or stock market performance. Which means that it's up to the general account to generate a return to remain profitable.

Assuming a 5% distribution rate, it would take 20 years to distribute 100% of the principal (assuming no interest and no other growth). After that 20 years, the annuity is now "in the money" as it's now the insurance company's money and not the original principal.

How can the insurance company afford to do that? Performance of the general account AND knowing that not everyone will live long enough to have their annuity be "in the money". Of course, depending on the annuity (just about all of them aside from a life-only SPIA), the remaining principal balances will be inherited by beneficiaries either in a lump sum or the remaining payments.

Using my 20 year and 5% distribution rate example, you can see that the insurance company has a lot of time on their side to make decent returns on the general account to afford to make those lifetime payments.

That may not be a 'sexy' or 'attractive' way to explain mortality or longevity credits, but it's how it works.

 

[walthamny]

I have found a simpler method. I used to follow Tom Hegna's example but death is difficult subject, mortality credits sounds something too good to be true.

I make sure they understand how social security works. SS is basically a Life only annuity with no premium refund for single guys. I never use these words of course.

Mr prospect, you have been paying for social security for x number of years. If you happen to leave us on the day of your retirement, social security will get to keep all the money you have been paying all these years. As a matter of fact, they are counting on few folks to do just that, leave us before collecting any money. In fairness, that is the only way they could afford paying all the other folks who are counting on 2k, 3k a month. Few of you would leave before collecting anything and hopefully most of you collecting won't be around at age 100. Now I don't know how long you are going to be around and ... go into your presentation

The important thing is for them to understand that SS is an income stream, most people think it is like a 401K their premiums are getting invested in their own private account and they can get x dollars a month when they retire. Really, only the last part of that is true.

I refuse to use the term mortality credits, unless they are harvard faculty type. It is too technical. If you get to understand annuities as income stream not as an asset, you will also sell more annuities and permanent insurance.

To be honest, no one would buy an annuity if I told you invest $3000 a year and at age 65 after 35 years you will have 300K, and you can get 4 times of what you put in, 12K a year in income, but if you die before retiring, the insurance company gets to keep all your money. That's how SS works for single people with mortality credits. It is a crude annuity. As advisors, we wouldn't be able to sell this even if we tried. Actually, the rate of return on SS is worse than that, but it comes with a disability rider which is pretty hard to qualify. Annuity won't have that if you want to get too technical.

The conversation is a little different for married folks, but the logic remains the same. I hope this helps.