Income Annuity Pricing For An 85-Year-Old Female
June 2, 2020 by Wade Pfau
We looked at longevity insurance as it applies to a sixty-five-year-old female purchasing a deferred income annuity with income starting at eighty-five. We may also consider the alternative of just waiting until age eighty-five and then buying an immediate annuity. During those twenty years, interest rates and mortality tables can change in unexpected ways, which will impact the future pricing calculations.
Exhibit 4.4 shows the calculated cost for this income annuity if we assume that interest rates and mortality data remain the same (an unlikely outcome, of course). An eighty-five-year-old will experience higher mortality rates and a shorter time horizon, reducing the cost of an income annuity at this age. In this case, the premium is $81,054, which raises the payout rate to 12.34 percent.
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