Retirement annuity is generally used as an income stream for retirees. An individual would pay the insurer a one-off premium or a series of regular premium to accumulate wealth, which would be annuitised and be paid back to the individual during the retirement life. The main purpose of this product is to hedge longevity risk, preventing the insured from outliving their available assets. As retirees look for a stable income replacement after retirement, they may seek annuities providing high guaranteed income with or without potential non-guaranteed income.
Note that buying an annuity is exchanging liquid assets into stable future income, surrendering it for urgent use may incur a significant loss. The insured may also suffer financial losses if the unfortunate event of death occurs early during the policy. 10Life calculates the score for each retirement annuity product by its longevity risk coverage, guaranteed return, projected return, early surrender coverage and early death coverage.
There is a large variety of annuity products, with different premium payment periods, income periods and currency options. 10Life separates available products into two main categories based on target customer segments.
- Deferred annuity, for wealth accumulation age
- Immediate annuity, for pre-retirement age
Deferred annuities involve a premium paying term, followed by a wealth accumulation term and finally an income term starting at retirement. Individuals planning for retirement during their wealth accumulation age may consider these products. We assume that the insured is a male at closest to age 45, planning to pay premium for 10 years (or nearest to 10 years) and start receiving annuity income at age 65.
Immediate annuities usually require a large premium being paid during a short period of time just before retirement. Individuals planning to retire from in the near or immediate future may consider these products. We assume that the insured is a male at closest to age 65, planning to receive annuity income at age 65.
Guaranteed Return Score
Insurers are obligated to pay the guaranteed income as a living benefit to the policyholder. 10Life calculates the guaranteed cash flow by considering the premium paid and guaranteed income in the scenario that the policyholder is alive at the age of 105.
10Life calculates the present value (PV) of income received versus premium paid discounted by the risk-free rates assuming the policy commences today. Risk-free rates of different currencies are determined by the long-term yields of the respective government bonds.
- USD: United States Treasury Bonds
- HKD: Hong Kong Exchange Fund Notes
The risk-free rates may be updated from time to time to reflect changes in the market.
The Guaranteed Return Score is calculated by the ratio of PV of income received and PV of premium paid, compared against the benchmark.