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|Subject: Re: Optimal level of annuity purchase may b nega||Date: 9/16/2013 10:38 PM|
|Author: intercst||Number: 72917 of 81316|
SPIAs don't have expenses 25% to 30% of the initial purchase.
Sure they do. Just compare the Money's Worth Ratio for the annuity with the quote you get from the insurance company. The difference is the insurance company's fees, expenses and costs.
The high cost of a no-fee, no-commission Single Premium Immediate Annuity (SPIA).
You can estimate the costs embedded in a single premium immediate annuity by comparing the premium quote you get from the insurance agent to the expected present discounted value (EPDV) of an immediate life annuity. The EPDV is sometimes called an "actuarially-fair annuity" or "money's worth annuity". Economists define the ratio between the EPDV and the premium quote as the Money's Worth Ratio (MWR).(Note 1.)
For individuals of average mortality, Money's Worth Ratios as low as 0.70 are not uncommon, depending on the annuitant's age. That would indicate that 30% of the purchase price of the SPIA is siphoned off in the insurer's various costs and expenses. For retirees who are aquainted with low-cost index funds where one can assemble a diversified portfolio of stocks and fixed income securities for an annual cost of 15 basis points (0.15%) in fees, the embedded costs of an SPIA seem large enough to choke a crocodile. Even if you applied a 15 basis point annual fee over the entire 50 to 60-year life of the annuity pool, it would still amount to less than 2% of the purchase price.
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