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Factors that influence your annuity rate of return?
Old 02-03-2010, 01:36 PM   #1
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Factors that influence your annuity rate of return?

I am too young to really consider annuities at the moment but am interested in learning more about them as a potential guaranateed income stream to supplement social security in retirement.

I know when somebody buys health insurance, your health influences what kind of premium you pay. Unhealthy people pay more because it is expected the insurance will pay out more benefits for them.

Does this fact work in reverse for annuities? Seems like those people with a lot of health issues would be ideal candidate for the companies selling the annuities because you are more likely to die sooner and thus they pay out fewer dollars? You would think you would get a better "return" (paid more per month) if you were more likely to die sooner.

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Old 02-03-2010, 01:40 PM   #2
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I don't believe there is "reverse underwriting" for annuities. I suspect that when the insurance companies price annuities, they price in some "adverse selection" by assuming these are more likely to be purchased by healthy people with family history of longevity.

The primary drivers of the payout you receive are your age and the prevailing long-term interest rates at the time. Annuities are priced to yield the same way high-grade long term bonds are: the lower interest rates are when you buy the annuity, the lower the monthly payout.

"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
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Old 02-03-2010, 02:33 PM   #3
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Many immediate lifetime income annuities do have a medical underwriting feature where if you have a known heath condition that will likely impact your life expectancy then they increase your initial annuity age which increases the amount your annuity pays out each month. Not sure what the process is but probably requires a letter from a doctor explaining the health condition.
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Old 02-03-2010, 02:52 PM   #4
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What the OP is referring to is adverse selection.

In general (with exceptions - of course), people who buy SPIA's tend to be in very good health and come from a family that tends to die old.

The insurance companies are well aware of this and price their products accordingly.
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