Annuity Pricing 101: Not As Hard As One Might Think
May 20, 2020 by Wade Pfau
How are income annuities priced? It is not as hard as one might think, as the basic recipe requires just three ingredients:
1. Mortality rates (which vary by age and gender) impact how long payments will be made. Younger people will have longer projected payout periods, which means that payout rates must be lower.
2. Interest rates impact the returns the annuity provider can earn on the underlying annuitized assets. Higher interest rates imply higher payout rates because the insurance company will be able to earn more interest on the premiums in their general account supporting the annuity payments.
3. Overhead costs relate to extra charges an annuity provider seeks to cover business expenses and to manage risks related to the accuracy of their future mortality and interest rate predictions.