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|Subject: Re: Lifetime Annuity||Date: 10/5/2013 11:53 PM|
|Author: synchronicityII||Number: 73451 of 77871|
According to a link that intcst (??) posted, even straightforward SPIA have massive fees that the customers just don't recognise.
Well, basically, what intercst (sp?) is saying that if you calculated the "fair" present value of the annuity stream, it would cost X% less than what the insurance company is charging (or alternatively, that for $Y in an SPIA you "should" get a larger annuity payout annually).
Which is all well and good, but the point of an annuity is that you're shifting mortality risk on to the insurer and away from yourself. There should be a charge for that. Insurance companies are good at measuring risk (well, usually, not always and not all of them, but that's a different story), and as The Joker said "If you're good at something, never do it for free".
I prefer to take the approach of looking at the IRR on a SPIA for each year. With a simple "Life Only" SPIA, if you die in year one the IRR is going to be something horrible like -95% (depending on the amount of the annuity payment, which obviously is greater the older you are when you buy the SPIA). At life expectancy for a 65 year old you might find the IRR to currently be something like 3%, which obviously isn't very good, but maybe it makes sense as a partial replacement for your bond allocation. At age 90 or 95 it might be closer to 5%. Dunno, I'm just making up numbers here and annuity quotes change daily and vary between companies and at different ages and of course you can get ones with "term certain" bits or "premium refund" options or lord only knows what.
In the end, it doesn't matter what the hypothetical price could be, but rather look at what you're getting for what you're paying and decide if it makes sense. Ray, I'm sure you of all people get that logic. The market sets the price, and you decide if you wanna pay it. Only thing I would add is that potential buyer should be told enough to make an informed opinion rather than just "sold" a product.
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