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Mortality cross subsidy

Mortality cross subsidy

Mortality cross subsidy is thing that makes annuity unique and enables them to pay income for life no matter how long you live. This is because the income paid to those who live longer than expected is subsidised from the income saved from those who die early than expected.

Mortality Cross Subsidy

Actuaries calculate annuity rates assuming people will live until their normal life expectancy. However, some policyholders will die before they are expected to and some will live longer than expected.

Insurance companies make a profit from those dying early and a loss from those living longer. They they use the savings from the early deaths to subsidise the income paid to those who live longer than expected.

This means that those who die before their normal life expectancy subsidise those who live longer than expected. This is called Mortality cross subsidy.

This clearly favours those in good health who may live longer than expected at the expense of those who die early because they are in poor health. To overcome this problem some insurance companies provided enhanced annuities which pay a higher income for those who have a medical condition which may reduce their normal life expectancy.

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