Annuitize Old Contracts to Generate Retirement Income

When advisors come across an old annuity contract, their first instinct, typically, is to replace it with a newer, more feature-rich, and possibly cheaper one. After all, newer is better, right? Not always.

Old annuity contracts have one very important advantage: They were designed with vastly different assumptions about mortality and interest rates. If the contract is old enough — 15 to 20 years old — these assumptions can be beneficial to the policyholder because the older the contract, the more potentially valuable it is.

For example, despite recent Federal Reserve interest rate policies, rates remain below where they were at the turn of the century. In May 2000, 10-year U.S. Treasury notes were yielding 6.51% compared with “just” 3.6% today. This means that insurance companies were basing their annuitization rates for these contracts at that time on the assumption they could earn much more interest than contracts issued over the last 15 years. This, in turn, means that these contracts likely have much more generous payout rates than offered in the market today.

Adding to the potential advantage is the fact that older policies are based on older mortality tables. Since life expectancy has increased over time, the older the mortality table that is used, the lower the assumed life expectancy, which in turn generally means a higher rate of annuity income.

While insurance companies update their mortality tables over time, it can often be many years after the National Association of Insurance Commissioners establishes the latest tables. For example, the 2001 Commissioners Standard Ordinary tables weren’t required to be used until 2009. This means that annuities issued before 2009 could have been issued with mortality tables created in 1980.