By Tom Hegna, CLU, ChFC, CASL
A lot of people ask me, “Hey Tom, why should I buy an annuity in today’s low interest rate environment?” With current rates being “low,” they may seem befuddled when asked to consider purchasing an annuity. I explain that today’s rates are not low. In fact, I believe these to be the “new” rates—and today’s rates may be the highest rates we could see for a very long time!
In addition, an annuity purchase today is not a play on interest rates. It is a mortality credit, or as I now call them, “longevity credits,” play. Just like the current rates, these longevity credits could be the highest longevity credits you may see for the rest of your life as well. Let me explain…
Last October, the Society of Actuaries (SOA) Retirement Plans Experience Committee (RPEC) released updated mortality tables that show a consistent trend of increasing life expectancy According to Dale Hall from the SOA, “the purpose of the new report is to provide reliable data that actuaries can use to assist plan sponsors and policy makers in assessing the financial implications of living longer.
Life Expectancy and Mortality Tables (2000 vs. 2014):
- Life Expectancy of a 65-Year-Old Male:
- 2000 Mortality Tables: 84.6 Years Old
- 2014 Mortality Tables: 86.6 Years Old
- 2.4% increase in life expectancy
- Life Expectancy of a 65-Year-Old Female:
- 2000 Mortality Tables: 86.4 Years Old
- 2014 Mortality Tables: 88.8 Years Old
- 2.8% increase in life expectancy
With increased improvements to medical technology, I predict that we will see significant additional growth in life expectancy and expect it to rise even greater than the current trends indicate.
These updated tables will require insurance companies to adjust their payout rates in order to properly reflect longer life spans. Advisors could be in for quite of a shock when they see these adjustments. I’m talking about payout rates going from 14% to 10%, from 9% to 7%, and from 7% to 5%. These will not be small adjustments!
That’s where income annuities come in. They can offer something that no other product can offer: Longevity credits. Cash flow from an income annuity hails from three different sources: Interest, return of principal and mortality credits. Traditional investments can typically manufacture two of these components—interest and return of principal. However, only life insurance companies can manufacture longevity credits.
When payout rates for income annuities are released with the new mortality tables, you will see the payout rates drop because of an adjustment in longevity credits. Combining the fear of outliving your money and the uncertainty of the market, you should consider locking in these guaranteed rates now as these are likely the highest longevity credits you will see for the rest of your life.
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