By Bill Broich
If you buy an annuity and you die, the insurance company keeps your money! We have all seen and heard that broad statement. Is it true?
No. Here is a secret about insurance companies, a secret that puts everything in perspective. Insurance companies do not make decisions based on individuals; they make decisions based on a large pool of people.
Their tool? The Commissioners Standard Ordinary Mortality Table, known as CSO. The statistical table allows insurance companies to know exactly how many people nationally in a specific age group will die. It is not a guess, it is pure science.
The reason this table is so important is because it allows insurance companies to set rates for calculating retirement benefits for anyone at any age.
As an example let’s estimate a male age 65 with $100,000 in a retirement account could receive $600 a month for life. Insurance companies know exactly statistically how many men age 65 will live and die each year, they also know the life expectancy for a male age 65 is 20.5 years.
What happens if an individual age 65 lives until age 100? What happens to the retirement funds place d in the annuity, did it stop at his life expectancy. (85.5 years) no, it continued until his ultimate death. Annuity payments payable for life are fully guaranteed and the insurance company will continue to pay and pay and pay.
How can they do that? Simple, by knowing how many men age 65 will die each year it would mean that another man age 65 didn’t live until life expectancy.
It is called the Law of Large Numbers.
The man who died early, did the insurance company keep his unused funds? No, all unused funds for anyone who dies prematurely will be returned in tact to the annuitants named beneficiary. All the instance company makes is the extra yield form the original deposit, no insurance company will ever profit form death.
So what is the lie? Those who do not understand how an annuity work or a competitor to the annuity industry will use half-truths to gain a competitive advantage with a prospect that is not fully informed.
Annuities mean guarantees, guarantees that can mean lifetime income without any fear of ever losing the retirement benefit. Annuities should be considered when planning the foundation of your retirement plan, they layer guaranteed income on top of your social security benefits and your pension retirement income to form the basis of your retirement.