Has anybody researched longevity annuities?

[tipster]

Some time ago, there was a thread here about longevity annuities -- annuities that only start to pay out if and when you reach an old age, such as 85.

Does anyone offer an inflation-adjusted longevity annuity?

I contacted MetLife to inquire about their longevity annuities, but I was not impressed. They gave me the following quote for my 61-year old mother:

Initial Purchase Payment: $30K
Commencement Date: 85 years old (24 years from now)
Income payment amount: $1571.04/month (non-inflation-adjusted)

I calculated the PV of this potential income stream using a 3% real interest rate (i.e., TIPS) as the discount rate and using the mortality statistics in the 2004 Period Life Table on the ssa.gov website.

The only way it would make sense is if there was no inflation.
With no inflation, the PV = $28,500
But with 3% inflation, the PV = $12,500
And with 4% inflation, the PV = $9,600

A horrible deal, IMO. (The PV calculations take into account the likelihood of one dying and getting nothing or little).

Has anyone else looked into longevity annuities and tried to estimate their value?

 

[FinanceDude]

Some time ago, there was a thread here about longevity annuities -- annuities that only start to pay out if and when you reach an old age, such as 85.

Does anyone offer an inflation-adjusted longevity annuity?

I contacted MetLife to inquire about their longevity annuities, but I was not impressed. They gave me the following quote for my 61-year old mother:

Initial Purchase Payment: $30K
Commencement Date: 85 years old (24 years from now)
Income payment amount: $1571.04/month (non-inflation-adjusted)

I calculated the PV of this potential income stream using a 3% real interest rate (i.e., TIPS) as the discount rate and using the mortality statistics in the 2004 Period Life Table on the ssa.gov website.

The only way it would make sense is if there was no inflation.
With no inflation, the PV = $28,500
But with 3% inflation, the PV = $12,500
And with 4% inflation, the PV = $9,600

A horrible deal, IMO. (The PV calculations take into account the likelihood of one dying and getting nothing or little).

Has anyone else looked into longevity annuities and tried to estimate their value?

MetLife is not stupid. They know the mortality rates at age 85 are quite high, even for women. However, based on the promise of having to deliver income for lifw in case she makes it, they suppress the IRR inside the contract so they are covered either way.

I would imagine they would have some sort of death benefit if she dies before she turns 85, otherwise this is the worst kind of deferred annuity on earth.........

 

[tipster]

I would imagine they would have some sort of death benefit if she dies before she turns 85, otherwise this is the worst kind of deferred annuity on earth.........

Yes, you're right. It does include a death benefit = total purchase payments compounded at 3% annually. I didn't include the PV of the death benefit in the calculations above.

So here's the PV (again using 3% real as the discount rate) of the death benefit, by my calculations:
If inflation = 0%, PV of death benefit = $15,300
If inflation = 3%, PV of death benefit = $9,800
If inflation = 4%, PV of death benefit = $8,500.

So total PV of LIG with death benefit:
If inflation = 0%, Total PV = $43,800
If inflation = 3%, Total PV = $21,300
If inflation = 4%, Total PV = $18,100

Still a bad deal, IMO.

Also, the way I see it, there isn't any point to paying an insurance company for a "death benefit." May as well just invest it yourself (e.g., in TIPS), and when you die, it goes to your heirs.

I would guess that the longevity annuities out there are all encrusted with useless features like the death benefit.

 

[FinanceDude]

Yes, you're right. It does include a death benefit = total purchase payments compounded at 3% annually. I didn't include the PV of the death benefit in the calculations above.

So here's the PV (again using 3% real as the discount rate) of the death benefit, by my calculations:
If inflation = 0%, PV of death benefit = $15,300
If inflation = 3%, PV of death benefit = $9,800
If inflation = 4%, PV of death benefit = $8,500.

So total PV of LIG with death benefit:
If inflation = 0%, Total PV = $43,800
If inflation = 3%, Total PV = $21,300
If inflation = 4%, Total PV = $18,100

Still a bad deal, IMO.

Also, the way I see it, there isn't any point to paying an insurance company for a "death benefit." May as well just invest it yourself (e.g., in TIPS), and when you die, it goes to your heirs.

I would guess that the longevity annuities out there are all encrusted with useless features like the death benefit.

You are forgetting the tax deferral in your caluclations. What bracket is your mom in? It won't change the decision that much but it is a factor. Bottom line, I don't like them, whether they're sponsored by MetLife, AARP,or Consumer Reports.........

 

[tipster]

You are forgetting the tax deferral in your caluclations. What bracket is your mom in? It won't change the decision that much but it is a factor. Bottom line, I don't like them, whether they're sponsored by MetLife, AARP,or Consumer Reports.........

Good point. Thanks. I'm also not factoring in the surrender value, if, for example, you found out you had a terminal condition and you wanted to cash out. It has a value, but I frankly have no idea how to put a PV number on that.

BTW, Mom's in the 15% bracket. I think ~5% state income taxes too.

 

[FinanceDude]

Wait until she retires. If she or you are worried, you can always find a good SPIA to cover her necessary expenses until she takes SS. In a year, she can take SS at age 62, so go to ssa.gov and do the PV calculation on her taking it at 62 verus 65 or 67.