| Annuitization is the even distribution of both principal | | | | The mortality tables based on life insurance |
| and interest, or growth of the annuity, over a | | | | experience are not suitable for use in the |
| specified period of time. There is a distinct advantage | | | | development of rates for annuities for several |
| to annuitization inasmuch as the disbursements are | | | | reasons: |
| tax-favored. Those situations where funds are | | | | 1. Generally, annuities are purchased by persons in |
| sporadic, the tax-favorable status does not apply. | | | | poor health. |
| Annuitization is allowed under nearly all annuity | | | | 2. Especially with single premium immediate annuities, |
| contracts. When the annuity is annuitized, the owner | | | | the rates of mortality among annuitants are generally |
| of the contract makes the decision as to how to | | | | lower than those insured covered by life insurance |
| receive the funds, i.e. what will be the mode of | | | | policies. Therefore, a life insurance table would |
| payment (monthly, semi-annually, annually, quarterly, | | | | overstate expected mortality rates. |
| etc.). Variable contracts and fixed rate contracts may | | | | 3. While the continual improvement in mortality rates, |
| be annuitized. | | | | even though offset occasionally by unanticipated |
| There is a disadvantage to annuitization. Once the | | | | developments (such as AIDs), creates a gradually |
| annuitization procedure has been established, it | | | | increasing margin of safety for life insurance |
| cannot be changed (except for a very few | | | | companies, it has just the reverse effect on |
| exceptions). There can also be a disadvantage if a | | | | annuities. |
| Variable Annuity is annuitized. In those cases, the | | | | Therefore, an annuity table must show the lower |
| amount of the check will vary, depending upon the | | | | rates of mortality that can be expected in the future |
| results of the sub-accounts selected and the amount | | | | instead of a table showing rates that have been |
| of money allocated to these sub-accounts. With a | | | | experienced in the past. Technically, these are called |
| Variable Annuity, the investment "ups-or-downs" are | | | | "Tables with Projection." as opposed to "static" tables |
| risks of the person receiving the checks, which is | | | | used for life insurance which did not provide for |
| usually the contract owner/annuitant, and is not that | | | | changes in rates depending upon the calendar year to |
| of the insurer. | | | | which they were applied. |
| Obviously, and as discussed in more detail later, the | | | | While life insurance has reaped the benefit of |
| more "aggressively" the money is invested, the less | | | | improving mortality, in annuity policies the improving |
| predictable is the payout stream. On the flip-side, if | | | | mortality has led to smaller margins as the |
| the annuity funds are invested in short-term bonds, | | | | "postponement" of death means more annuity |
| utilities or money market sub-accounts, the more | | | | payments and annuity tables in use today usually |
| predictable the income will be from time to time. | | | | contain projection factors that make allowance for |
| Another possible disadvantage for annuitizing a fixed | | | | future reductions in mortality rates. The need for |
| rate annuity is that the amount of each check | | | | such calculations is particularly important in variable |
| depends upon the competitiveness of the insurer, | | | | annuities because this portion of the annuity business |
| what the current rates happen to be at that time, | | | | is growing and there is no interest margin to help |
| the duration of the withdrawals, and of course, the | | | | offset mortality losses that develop. |
| principal amount annuitized. | | | | To further complicate this discussion, there are |
| MORTALITY & ANNUITY TABLES | | | | annuity tables that are used for different purposes. |
| Those in the life insurance industry are familiar with | | | | For instance, the 1949 Annuity Table was developed |
| mortality tables, at least in concept. Basically a | | | | to reflect steady improvement in mortality; the 1955 |
| mortality table represents a record of the number of | | | | Annuity Table was developed to help determine the |
| persons dying and those surviving at each age out of | | | | proper rates for annual-premium deferred annuities |
| a composite of a large number of lives. In other | | | | and live income settlement options. In 1971 the Group |
| words, a mortality table is a chart that shows the | | | | Annuity table was developed for the (at that time) |
| rate of death at each age in terms of number of | | | | time field of group annuities. Presently, the 2009 |
| deaths per thousand. It shows a hypothetical group | | | | Annuity Basic Mortality Table has been endorsed by |
| of individuals beginning at a certain age and traces | | | | the Society of Actuaries to be used for individual |
| the history of the entire group year by year until all | | | | annuities written in the U.S. but it is an extension of |
| have died. | | | | the 1983 Individual Annuity Mortality Table. |