Opinions on longevity annuities

[Independent]

I think a sensible approach would be to calculate expected cash flows (contractual annuity benefit * probability that you will be living) and then calculate an IRR that equates that expected cash flow to the upfront premium.

That makes sense for an insurance company. They really pay out just 50% of the scheduled benefits in the year that exactly 50% of the original buyers are alive.

I know how to do that math, but I'm not sure what the answer does for me, (other than to give a very rough estimate of whether the insurance company seems to be investing about like I'd invest).

 

[Independent]

no, I'm thinking about anyone that's ever taken a class in life contingencies and/or interest theory calculates the PV of an annuity

I understand that. I'm saying that the PV of the annuity isn't a particularly interesting number in my planning.
I can do a similar calculation for a term life insurance policy, but the result doesn't tell me if I should buy the policy.
Being able to do a calculation doesn't make the result useful.

 

[Big_Hitter]

Being able to do a calculation doesn't make the result useful.

sure it does - you can tell if you're getting ripped off or not

 

[Independent]

sure it does - you can tell if you're getting ripped off or not

What does "ripped off" mean?

When I buy insurance, I expect that my premium is higher than the PV of the expected benefits (at least if I use the same interest rate they are assuming in their pricing). Insurance companies have expenses and profit goals that have to be included in premiums.

But, I still buy insurance.

 

[Big_Hitter]

ripped off means that the price of the policy is based on something much lower than prevailing interest rates and/or outdated mortality

 

[nun]

Some calculation that gives you an interest rate assuming a particular life expectancy can be instructive, it can teach you how SPIAs work. But if you are considering an SPIA you are trading risk for guaranteed income and you wouldn't expect it to compete with equities or anything with any risk for long term return. What you get is a guarantee, morality credits and the ability to get more than 4% withdrawal from your lump sum. That might be important to you in the years between ER and taking SS, but if the SPIA doesn't have a COLA you need to plan for that. Just like other products you must shop around and see what your money can buy. Basic Googling will get you an idea of the prevailing rates. This is also why you should stick to SPIAs or simple fixed deferred annuities...... you have a chance of understanding those. If you go to a big respected companies you will quickly get an idea of what your money will buy. I did all that before buying into my pension/annuity plan.

FYI Principal via the vanguard annuity quote service came up with the following for my situation. If I purchase an SPIA now at age 54 with $263k A single life annuity pays $1206 per month, witha 2% COLA that goes down to $904/ month in the first year. Compare that to my state DB plan that pays $1650/ month with a 2% COLA.

 

[Independent]

ripped off means that the price of the policy is based on something much lower than prevailing interest rates and/or outdated mortality

In the deferred annuity world, a company using outdated mortality or interest rates is probably charging the lowest prices. That would be good for me.

I don't do a calculation to determine if I'm getting "ripped off" when I buy auto insurance, or homeowners insurance, or term life insurance.
I can comparison shop to get a good market price. Then I can see if the result fits my financial needs.

Yes, I understand that in the early years of a traditional SPIA I'm basically trading dollars with the insurance company for high probability events. In that case, an IRR calculation can be a good filter.

But, this thread is about "longevity insurance", so my comments are tilted toward that product. Note that I tried to separate them back in post #7.

 

[Big_Hitter]

regarding longevity insurance, I would independently confirm the (net of loads) interest and mortality assumptions before buying, that's all


I doubt the LIC selling the product would give a buyer that data.