What Factors Influence Annuity Value for Money: Lessons from Other Countries
Before evaluating these studies, this Insight first explains how annuity money’s worth is calculated and the implications of the assumptions made regarding mortality risk and interest rates.
An annuity purchaser pays a manufacturer a lump sum premium and in return receives an income stream, typically for life. For example, a 65-year-old individual might pay an insurance company $100,000 in return for an income stream of, say, $500 a month ($6,000 a year) for the rest of his/her life. The income stream can be a fixed monthly or annual dollar amount (also called nominal annuities, as in the above example), can increase at a fixed percentage each year, or can be indexed for inflation. Some annuities provide a deferred income, so that the annuity is purchased (say) at age 50, with income starting at (say) age 65 (so-called deferred annuities). Other annuity products guarantee that the income will be paid for a minimum number of years in the event of early death (so-called guaranteed annuities).