Pooling Risk

RISK POOLING IS A GREAT WAY to handle life’s financial pitfalls, and we are happy to do it—most of the time. When we buy life insurance or we purchase a homeowner’s policy, we’re contributing to a pool of money that’s overseen by an insurance company and to which many others are contributing. Those who see their homes burn down, and the families of those who die, collect big money from the pool. Those of us who remain standing—and whose homes remain standing—don’t collect on our insurance policies. We are out of pocket, but you won’t hear many complaints.

Unless, that is, we are talking about a form of risk pooling known as an income annuity. Income annuities come in all kinds of flavors. But the idea is basically the same: We throw in our lot with other retirees, so we can share risk. The insurance company that manages the pool is able to promise handsome income for life because it knows that, while some retirees will collect checks until they’re age 95, others will only collect until 75.

Why do folks—who happily buy life, health, disability, auto and other insurance—balk at this type of risk pooling? Maybe it’s the taint associated with the label “annuity.” Most of the abuses over the years, however, have involved equity-indexed annuities and tax-deferred variable annuities, not income annuities.

Or maybe it’s the double downside of income annuities: If we die early in retirement, not only do we fail to get much back from our big annuity investment, but also we’re well and truly dead—and that thought just isn’t palatable.

Next: Immediate Fixed Annuities

Previous: Income Annuities

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