When you invest in an annuity, the insurer typically pools your money with the funds of others to help create retirement income for life. A key benefit of pooling is a mortality credit, which can help increase your annuity payments. It’s similar to insurance — insurers typically pool premiums, but only some policyholders file claims and receive benefits. The mortality credit is the extra income annuitants may receive when people in the pool pass away earlier than expected.

This article explores annuity mortality credits, explains how life expectancy pooling can boost payouts, and shows how annuities can leverage these credits. You’ll also see how Gainbridge can help you make sense of it all and help secure a comfortable retirement with guaranteed income for life. Please note that not all annuities offer mortality credits and annuity mortality credits are typically only offered to lifetime income annuities and varies from company to company.

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What are annuity mortality credits?

When offered, annuity mortality credits are financial benefits shared among annuitants in the same pool. When you buy an annuity, you join a group, and your annuity company uses the money in this group to guarantee your retirement income. When a person from your group passes away sooner than expected, your annuity company retains any remaining funds not paid out and adjusts the payouts of the remaining annuitants in the pool.

The longer you live, the more you may benefit from this pooling effect. Contrast this annuity structure to bond ladders. Investors can use annuities and bonds to generate a guaranteed stream of income in retirement. Bonds invest in debt, typically paying regular interest payments for a specified period before returning the principal. They can be low risk, but limited. 

Certain annuities offer something that bonds can’t: mortality credits that can produce higher income to help ensure you don’t outlive your money. These benefits are what make income annuities unique. 

How pooling life expectancy works

While no one can predict an individual’s life expectancy, annuity companies can make projections across thousands of people to forecast outcomes. This is the law of large numbers. 

Let’s liken it to auto insurance. If an insurer knows the number of car accidents that occur in a population, it can better assess risk when issuing policies. If one in 5,000 people will be in an accident and file a claim, only underwriting 50 policies can be far riskier than 50,000. The more policies it writes, the more confident the insurance company can be that the premiums from people who will never file claims will offset the cost of insuring the relatively few who do. 

With annuities and mortality credits, insurers know that some people will die before the anticipated life expectancy, some near the average, and others well past it. In a large sample, this creates a predictable distribution, giving insurers the confidence to offer higher payments to those who live longer because those who die early help balance things out. 

Pros and cons of mortality-credit-enhanced annuities

It’s important to weigh the advantages and disadvantages of mortality credits when buying an annuity. 

Pros

Annuities offer plenty of advantages, including reliable income and protection. 

• Typically higher guaranteed income than bonds: Mortality credits can allow lifetime annuities to offer higher payouts than bonds. 
• Protection against outliving assets: Longevity annuities – a type of Income Annuity — ensure payments continue for life, protecting against outliving your savings. 
• Predictable payments for life: Payments can be predictable and consistent. You can receive the same amount of income at set intervals throughout retirement. 

Cons

Before purchasing an annuity, consider the disadvantages.

• No (or reduced) death benefit for heirs: In a straight life annuity, there is no death benefit. Income only goes to living annuitants. So little or no principal remains for heirs. Some annuities do offer a death benefit, joint payouts and period certain payouts. 
• Less liquidity: Your retirement income is locked up in a series of annuity payments. You typically can’t tap it for emergencies or pass it on without incurring charges and a potential tax hit. 
• Mortality expense fees: Some insurers charge mortality and expense (M&E) fees, especially with variable annuities. This is to help cover administrative costs and financial risks of guaranteeing death benefits. 

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The impact of annuity mortality credits on payouts

It’s easy to see the impact of annuity mortality credits on income with an example. 

Consider 10 retirees who each invest $10,000 into an annuity pool, totaling $100,000. Based on life expectancy tables, the annuity company expects each individual to live 10 more years. 

If someone passes away earlier than expected, the annuity company holds on to the unused balance and uses it to provide higher payouts for the surviving annuitants in the pool. As more retirees in the pool die, the remaining individuals can benefit from increasing mortality credits, elevating their income over time. After 10 years, survivors in the annuity pool may receive more than their original investment plus interest would have yielded.

*Hypothetical example for illustrative purposes only. Results will vary. 

Simplify retirement planning with Gainbridge 

Mortality credits are one element that makes certain annuities distinct from other investments. By pooling life expectancy for lifetime income annuities across a large segment of people, insurers can offer lifetime income — a major advantage of annuities over bond returns. This can help alleviate the concern that you’ll run out of money as you age. 

Of course, mortality credits come with considerations. Gainbridge makes sense of it all, demystifying how different types of annuities function by providing helpful and tailored resources. This can help you to find a product that aligns with your unique retirement goals. Whether you’re considering an annuity that provides lifetime income or seeking more flexibility along the road to retirement, we have options with no hidden fees or commissions. 

Explore a straightforward way to secure lifetime income with Gainbridge digital-first annuities. 

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This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes. Guarantees are backed by the financial strength and claims-paying ability of the issuer.

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