# Indexed annuities



## NorthernRaven (Aug 4, 2010)

I don't know if MoneyGal is still around, but perhaps someone knows a bit about indexed annuities. I was curious:

1) Are they "neutrally" priced by issuers? For instance, if someone offers $X/month for a given sum as a non-indexed annuity, and a smaller sum $Y for a 2% indexed annuity, is the difference just a mathematical adjustment based on their mortality tables or whatever, or is there some sort of extra profit baked in there as well?

2) Is there a way to convert a non-indexed annuity quote to a decent estimate of an indexed quote? If I have quotes on non-indexed and 2% annuities from the same company at the same quotation date, is it possible to turn a non-indexed quote from them, say a year later into what they'd quote for a 2% annuity? My gut seems to think that the mortality is "baked in", and that doing something like calculating the amount that would produce the same break-even point as the original pair, for instance, might work. But my brain immediately poured out smoke when I tried to think about the relationship!


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## leslie (May 25, 2009)

You can convert an flat annuity $income into the equivalent PLA price level adjusting $income stream with this spreadsheet. http://www.retailinvestor.org/ConvertFlatToIndexed.xls The Personal Spending variable would be the PLAannuity's quote for this purpose. 

Any comparison must incorporate taxes, and I have failed to find anyone on record regarding the taxation of PLA annuities, or Deferred annuities for that matter too. Its my understanding that a) PLA annuities do not qualify for the best tax treatment of 'prescribed annuities' but b) that they are allowed for RRIFs which would delay the recognition of taxable income.

It is my understanding that the pricing of products is very much influenced by market competition/demand. Eg the pricing for immediate annuities at age 65 is best because there are many buyers and all firms compete there. There is little demand for PLA annuities because the period of time in which you can die without seeing a cent is greatly lengthened. 
Also consider the the risk of issuers is largely offset by their selling life insurance at the same time that equals and offsets normal annuities - but I don't know of any products that do the same thing for PLA annuities. Sot they would charge more for facing greater risk.


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## OptsyEagle (Nov 29, 2009)

My guess is that an insurer would first calculate a straight life annuity quote and then would simply adjust, by way of mathematics, the payments for a level percentage increase. In other words, it is simple math to work out the "net present value" of a series of level payments or a series of increasing payments. As long as the two had the same net present value, the insurer would probably not care much which one the purchaser took.

That being said, there is a big difference between an inflation protected annuity and an increasing payment annuity. The 1st protects one against very large changes in the cost of living and the 2nd just gives one a raise. The 1st one is very expensive to buy and I would not recommend it. The 2nd is just an adjustment of the payments.

What I would suggest is that you purchase a straight life annuity with level payments and use things like CPP (an income raise at age 60) OAS (a raise at age 65) and other savings (RRIFs provide a raise at age 71 or earlier) to deal with the increasing cost of living over your lifetime. A person does not actually need a raise EACH year to deal with inflation. An income boost every 5 years or so should certainly suffice.


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