Banks need to make money on their products. Instead of offering annuities they could just put that money into the stock market* . So they need to make as much as they would in an index matching fund plus operating expenses plus a profit.

So their actuary says, "this guy will (statistically speaking) live another 23.2 years. If we pay him x dollars a month, we'll break even on his premiums". And the actuary's boss says, ok, pay him x-.12x.

Banks could compete on that -12%, but only so far. The cost of administering the program, plus profit is the friction, the waste that you're losing out on, and it's usually far more than the risk you're mediating by not putting it all in an index fund.

Basically, the bank is an unnecessary middleman. But a) they've got good salespeople and b) most people don't control their money optimally, so the waste of annuity may be less than the waste an undisciplined investor may make.

*This is an oversimplification, there are issues of risk diversification, and probably some laws about where banks invest their money.

Not precisely tontines. For variable annuities, your return depends much more on the market (highly unpredictable) than on the deaths of other members (highly predictable, in aggregate). For fixed annuities, of course, your return is fixed.

This depends partly on the terms of the insurance and partly on the laws. I work as an actuary and at the moment our company's rules are:

• if the price of the insurance depends on your occupation, you are obliged to report if your occupation has changed and your premiums may be reset to new values (higher or lower)
• if the price depends on whether you smoke, you aren't obliged to report when you start, but we reserve the right to ask you and then you must truthfully answer (and then the premiums may change)
• if the price depends on you weight, only your weight at the insurance start date is important, no need to report later changes (and even if you do - e.g. in case you sign another insurance - your old premiums remain intact)
• if you lie or violate your obligations to report, your benefits may be cut in the ratio of your actually paid premiums and the premiums you would counterfactually pay if you hadn't lied (this is, more or less, specified by the law)

We don't sell any policies which are more expensive for people who are less likely to die (such as pure endowments), but even if we did, I find it hard to imagine that we'd offer lower price for smokers. That would be pretty bad marketing - "insurance company XY motivates their clients to smoke" makes for a pretty diappointing headline. Suing a client for quitting smoking? Unthinkable.

By the way, if I decide to invest in my retirement, I'd want to buy pure annuity without any guarantee or death insurace; I'll need the money if I survive to old age. Unfortunately I don't even know whether such products are ever sold, people clearly prefer to have a guaranteed 10 year annuity or fund transfer to their heirs in case of death or whatever similar, since they are now certain that the insurance company doesn't consume their savings if they die. But it makes the insurance significantly more expensive and most of the advantage the insurance has over bank savings is lost.