SPIA rate lock?

[Ret2018]

I'm in the process of purchasing a SPIA. Quotes have a "rate lock," but when I look at the quotes I don't see an interest rate per se. The only thing I see is an "Income as % of Premium" rate. Is that the rate I am locking in?

[Silk McCue]

If you see a rate referenced that’s the rate. What else would it be? Regardless ask them.

Cheers

[Northern Flicker]

Income as a percentage of premium is called the payout rate. It includes return of principal as well as interest.

While I am inclined to assume that this is what is being locked, your question can be answered by the annuity broker and by reading the terms/contract, not by someone unfamiliar with the product.

[stlrick]

Although it certainly can be of interest to know the interest rate being used in calculation of a SPIA payout, in another sense it is irrelevant. You directly compare SPIAs on the basis of the payout rate, which includes your principal, the interest rate, and mortality credits. One quote may have a higher internal interest rate but a lower payout rate because it uses a different life table than another quote. All the factors in combination result in a payout rate, which is what you are purchasing.

[Stinky]

I'm in the process of purchasing a SPIA. Quotes have a "rate lock," but when I look at the quotes I don't see an interest rate per se. The only thing I see is an "Income as % of Premium" rate. Is that the rate I am locking in?

Yes, what you’re locking is the monthly payment per $1,000 of premium.

Or, as you put it, the “income as % of premium”.

[Ret2018]

Thanks, all.

[Rex66]

They can’t actually give you an exact interest rate bc they don’t know when you will die

Now if they wanted to, they could provide an illustration showing what the interest rate would have been depending on age of death. I’m sure they don’t and won’t easily do this though.

[Northern Flicker]

They can’t actually give you an exact interest rate bc they don’t know when you will die

Now if they wanted to, they could provide an illustration showing what the interest rate would have been depending on age of death. I’m sure they don’t and won’t easily do this though.

Normally, it is assumed that the principal will have been fully returned at the age of life expectancy from the date/age at which the SPIA is issued. This can be used to calculate an interest rate/yield/return of the SPIA, which is different from (and lower than) the payout rate.

[Rex66]

They can’t actually give you an exact interest rate bc they don’t know when you will die

Now if they wanted to, they could provide an illustration showing what the interest rate would have been depending on age of death. I’m sure they don’t and won’t easily do this though.

Normally, it is assumed that the principal will have been fully returned at the age of life expectancy from the date/age at which the SPIA is issued. This can be used to calculate an interest rate/yield/return of the SPIA, which is different from (and lower than) the payout rate.

Insurance companies use their own non disclosed life tables. They use different ones for life insurance but again tables are not disclosed.

[Northern Flicker]

They can’t actually give you an exact interest rate bc they don’t know when you will die

Now if they wanted to, they could provide an illustration showing what the interest rate would have been depending on age of death. I’m sure they don’t and won’t easily do this though.

Normally, it is assumed that the principal will have been fully returned at the age of life expectancy from the date/age at which the SPIA is issued. This can be used to calculate an interest rate/yield/return of the SPIA, which is different from (and lower than) the payout rate.

Insurance companies use their own non disclosed life tables. They use different ones for life insurance but again tables are not disclosed.

Not available a priori, but if you buy a SPIA in a taxable account, the insurer has to generate a 1099 that reports the interest. The IRS views the return of principal to be equal payments over the period of life expectancy from the date of purchase. So if you subtract interest from payout to calculate the principal returned in the first year, and divide premium by that, you will have a very good estimate of the life expectancy used. (The annuity broker commission has to be accounted for to get a precise number). A similar strategy can be used to estimate the interest rate.

I think it would be fair game to ask the broker for an accounting of the payout that provides how much is principal and how much is interest.
As an aside, I would prefer to buy a SPIA in a trad IRA than in a taxable account.

[crefwatch]

Doesn't the term "rate lock" mean to you that "we will continue to offer you this deal for the next XX days?" In any case, they will have to put a contract in front of you, and before you can sign, you can compare what it says with what they said you had locked in. If it has fudges and doesn't show the number that the quote did, I would not sign it.

Many potential annuity customers focus on the payout as a percentage of the amount annuitized, but as others have noted, this includes your principal, as well as a baked-in interest rate used in the annuity formula. Since that interest rate does not appear in the newspaper, I don't see that it's very valuable to you. If you are comparing other SPIA products, aren't you mainly comparing what the lifetime monthly payment will be for the same Principal Amount? Along with the credit rating of the insurance company, that's really what you care about.

[Northern Flicker]

You would compare payout rates if comparing different SPIAs. If a SPIA pays $500/mo. I generally wouldn't care how the life expectancy tables, interest rates, expense ratio, and broker commission all contributed to determining that number. I get $500/mo. The percentage that is return of principal will determine taxable income, so I would care some about that in a taxable account.

But I would want to know the investment return/yield/interest rate to see if I'm getting a good deal. If say the 10-yr treasury is at 5% and the annuity interest rate is 4% (with higher credit risk) then I'd know it was not a good deal. Either the annuity broker commission, or administrative cost/expense ratio, or both are too high.