Mortality Cross Subsidy and Mortality Drag

Insurance companies set their annuity rates knowing that some annuitants will die before their average life expectancy and some will live beyond it. Lifetime annuities are able to provide annuitants with an income for life because the unused funds of those who die earlier than expected help to pay the annuities of those who live on. This process is called mortality cross-subsidy.

If you do not use an annuity to provide pension income you will not benefit from mortality cross-subsidy. To compensate for losing the cross-subsidy your underlying investments need to grow by an extra amount. This is called mortality drag.