In prior posts, we discussed possible assumptions used by life insurance company actuaries in pricing single premium immediate life annuities (SPIAs). In those posts, we provided implied discount rates consistent with quotes obtained from ImmediateAnnuities.com based on two different mortality assumptions (one based on life expectancy (50% probability of survival) and the other based on a 25% probability of survival, which is the basis we recommend in our website for planning purposes).
In this post, we will examine the implied interest rate assumptions built into quotes from ImmediateAnnuities.com as of January 9, 2023 and compare the quotes and the implied interest rates with the results of the similar exercise we performed as of November 25, 2022. 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 decreased over the past several months. We have no idea, however, if they are going to decrease even more in future months (or even increase).
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 January 9, 2023 and November 25, 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 1/9/2023
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 | $532 | 396 | 5.3% |
60 | $570 | 336 | 5.3% |
65 | $628 | 276 | 5.3% |
70 | $710 | 216 | 5.1% |
75 | $833 | 156 | 4.2% |
80 | $1,030 | 108 | 2.4% |
Implied Interest Rates based on ALI Life Expectancy as of 11/25/2022
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 | $ 575 | 396 | 5.9% |
60 | $ 613 | 336 | 6.0% |
65 | $ 670 | 276 | 6.0% |
70 | $ 752 | 216 | 5.9% |
75 | $ 863 | 156 | 4.8% |
80 | $ 1,041 | 108 | 2.6% |
The more recent table shows that annuity quotes from ImmediateAnnuities.com have decreased somewhat since November 25, 2022 and so have the implied interest rates. As noted above, the implied interest rates consistent with the ALI mortality table (50% probability of survival) 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 age 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 1/9/2023
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 | $532 | 468 | 5.7% |
60 | $570 | 408 | 5.9% |
65 | $628 | 348 | 6.3% |
70 | $710 | 276 | 6.7% |
75 | $833 | 228 | 7.6% |
80 | $1,030 | 168 | 8.7% |
Implied Interest Rates based on 25% Probability of Survival as of 11/25/2022
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 | $575 | 468 | 6.3% |
60 | $613 | 408 | 6.6% |
65 | $670 | 348 | 7.0% |
70 | $752 | 276 | 7.4% |
75 | $863 | 216 | 7.8% |
80 | $1,041 | 168 | 8.9% |
It is interesting to note that implied interest rates (or rates of return) for older annuitants are higher than implied returns for younger annuitants on this alternate “planning” 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 at the illustrative ages shown would also be developed for current SPIA quotes for females.
Conclusion
Decreases in interest rates over the past few months have decreased the amount of current monthly immediate life annuity that may be purchased with a given premium amount and has decreased implied interest rates (or rates of return) on currently available SPIAs. We have no way of knowing whether additional decreases in interest rates used to price SPIAs can be expected at this time. We are not investment advisors or insurance brokers and cannot provide advice on timing or the financial advisability of SPIA purchases. We do plan to continue to monitor implied rates of return on SPIAs in this blog (on both a pricing and planning basis).
