In our post of April 2, 2022, we discussed possible assumptions used by life insurance company actuaries in pricing single premium immediate life annuities (SPIAs). In that post, we provided implied discount rates consistent with quotes obtained from ImmediateAnnuities.com based on two different mortality assumptions (one based on life expectancy and the other based on a 25% probability of survival, which is the basis we recommend in our website for planning purposes). In our post of May 18, 2022, we updated these implied interest rates consistent with SPIA quotes available on that date.
In this post, we will examine the implied interest rate assumptions built into quotes from ImmediateAnnuities.com as of July 25, 2022 and compare the quotes and the implied interest rates with the results of the similar exercise we performed as of May 18. You may wish to revisit our prior posts for more general discussion of annuity pricing assumptions.
The key takeaway from this post is that implied interest rates (rates of return) on SPIAs have increased significantly so far this year. We have no idea, however, if they are going to increase even more in future months.
Updated Implied Interest Rates in Current SPIAs
The second column of the tables below show monthly life annuity quotes for males of different ages per $100,000 of premium from Immediateannuities.com as of July 25, 2022 and May 18, 2022. Life expectancies shown in third column are 50% probabilities of survival from the Actuaries Longevity Illustrator (ALI) for non-smoker males in excellent health. The fourth column (Implied Interest Rate) shows our calculation of the fixed investment rate of return that would be earned if a person bought the annuity and died at his current age plus his life expectancy from the ALI table (in months). This investment return is net of insurance company expenses and profits (but not net of taxes). These rates are nominal rates and not real (net of assumed Inflation) rates.
Implied Interest Rates based on ALI Life Expectancy as of 7/25/2022
Current Age | Fixed Monthly Life Annuity | Life Expectancy in Months (based on AAA Longevity Illustrator 50% planning horizon for a non-smoking male in excellent health) | Implied Interest Rate |
55 | $520 | 396 | 5.1% |
60 | $559 | 336 | 5.1% |
65 | $612 | 276 | 5.0% |
70 | $688 | 216 | 4.7% |
75 | $804 | 156 | 3.6% |
80 | $1,002 | 108 | 1.8% |
Implied Interest Rates based on ALI Life Expectancy as of 5/18/2022
Current Age | Fixed Monthly Life Annuity for Male ($100,000 Single Premium | Life Expectancy in Months (based on AAA Longevity Illustrator 50% planning horizon for a non-smoking male in excellent health | Implied Interest Rate |
55 | $ 501 | 396 | 4.8% |
60 | $ 538 | 336 | 4.7% |
65 | $ 606 | 276 | 4.9% |
70 | $ 678 | 216 | 4.5% |
75 | $ 794 | 156 | 3.4% |
80 | $ 988 | 108 | 1.4% |
The more recent table shows that annuity quotes from ImmediateAnnuities.com have increased somewhat since May 18, 2022 and so have the implied interest rates. As noted above, the implied interest rates consistent with the ALI mortality table for older non-smoking annuitants in excellent health are much lower than for younger annuitants, indicating that insurance company pricing for older annuitants may assume longer life expectancies and/or lower interest rates due to shorter assumed durations.
The tables below tell a different story for individuals who live until their 25% probability of survival rather than their 50% probability of survival. It can be argued that these implied rates of return are more applicable to individuals considering an annuity purchase if their plan includes living approximately five years longer than their life expectancy.
Implied Interest Rates based on 25% Probability of Survival as of 7/25/2022
Current Age | Fixed Monthly Life Annuity | Lifetime Planning Period (based on AAA Longevity Illustrator 25% planning horizon for a non-smoking male in excellent health) | Implied Interest Rate |
55 | $520 | 468 | 5.5% |
60 | $559 | 408 | 5.8% |
65 | $612 | 348 | 6.1% |
70 | $688 | 276 | 6.3% |
75 | $804 | 228 | 7.2% |
80 | $1,002 | 168 | 8.2% |
Implied Interest Rates based on 25% Probability of Survival as of 5/18/2022
Current Age | Fixed Monthly Life Annuity | Lifetime Planning Period (based on AAA Longevity Illustrator 25% planning horizon for a non-smoking male in excellent health) | Implied Interest Rate |
55 | $501 | 468 | 5.2% |
60 | $538 | 408 | 5.4% |
65 | $606 | 348 | 6.0% |
70 | $678 | 276 | 6.2% |
75 | $794 | 216 | 6.6% |
80 | $988 | 168 | 7.9% |
It is interesting to note that implied interest rates (or rates of return) for older annuitants are higher than returns for younger annuitants on this alternate mortality basis. This is because moving from 50% probability of survival to 25% probability of survival generally adds about five years to the expected time of death, and an additional five years is a much more significant increase for an 80-year-old than it is for a 55-year-old (and may explain why insurance companies may be more likely to assume greater anti-selection by older annuitants in their pricing).
The above charts develop implied interest rates on two mortality bases for current annuity quotes for males. Based on a quick review, it appears that comparable implied rates of return would also be developed for current annuity quotes for females.
Conclusion
While recent increases in interest rates have increased the amount of monthly life annuity that may be purchased with a given premium amount and has increased implied interest rates (or rates of return) on life annuities, it may still be wise to wait until interest rates have stabilized before actually purchasing an annuity. Note, however, that we are not investment advisors or insurance brokers and cannot provide advice on timing of SPIA purchases. We do plan to continue to monitor implied rates of return on annuities in this blog (on both a pricing and planning basis).
