Annuity Payouts Decreased Due to New Mortality Table
There is so much to be thankful for these days, including the probability that we will live longer than the previous generation. In fact, each year since World War II, life expectancy has grown by an average of two months. Life insurance companies have mixed feelings about this. Policyholders living longer make their existing book of life insurance business more profitable, but their book of annuities (with guaranteed lifetime annuity payouts) less profitable. Every once in a while, insurance companies update the mortality tables that they use to price their products. A mortality table is simply a set of probabilities showing how likely an individual is to live to a certain age.
How much longer are people living?
The Society of Actuaries issued updated mortality tables in 1983, 2000, and 2012. A 65-year-old couple had a 28% chance that one of them would live to age 95, according to the 1983 mortality table. That probability had grown to 36% by 2000, and 52% as of 2012.
The 2012 table reflects the increase in life expectancy since the previous update (2000 to 2012). However, for the first time, the new table also prices in an assumption that the trend (growing life expectancies) will continue. So annuity payouts on new policies should continue to decrease even if a new mortality table is not adopted after the 2012 table. The good news is payouts on existing policies are unaffected by the new table. So, congratulations if you already own an annuity with a lifetime income guarantee.
You may be wondering why I am writing about this in 2016 if the most recent change to the mortality tables happened in 2012. The reason is many insurance companies are very slow to adopt the new tables. The new table, which reflects longer life expectancy, requires their company to put more money in reserves (decreasing earnings) and reduce the lifetime payouts on new annuity policies sold (making their products less attractive). This is especially a problem if some companies adopt the new table and others don’t.
Almost all states have begun requiring insurance companies selling policies within their borders to use the updated (2012) table as of January 01, 2016.
Three big impacts of the new mortality table:
1) Pension Plans that were already underfunded will now be substantially more underfunded because you need more money to fund longer life expectancy.
2) Lower payouts and smaller tax-deductions for Charitable Gift Annuities. CGAs work like this: A donor gives money to a charitable organization in exchange for income for life. The lifetime income payout is based on the donor’s age (read life expectancy). The donor also gets a tax deduction for the “present value of the future gift” meaning the principal that transfers at the person’s death. I always think of the Salvation Army when I think of CGAs. Check out the Salvation Army’s CGA brochure HERE.
3) Lower payouts on all types of annuities with lifetime income guarantees.
Many people have felt that the past couple of years have not been a good time to buy annuities because interest rates are low. Remember that interest rates are only one factor in calculating annuity payouts. The other big one is life expectancy. Today’s annuity rates may seem low, but they may prove to be downright generous if medical breakthroughs significantly improve life expectancy beyond what is already projected.