Unit-linked annuities and the annuity factor – playing with death

Annuity Factor

What are annuity factors and how do they work with unit-linked annuities? ?

Here you read the 2. Part from 04.12.12: "Guaranteed annuity factor – part 2"

Unit-linked pension insurance is actually a "must" for pension products that are supposed to achieve a certain pension amount at the start of retirement. In any case, for anyone who seriously wants to make private retirement provisions and still has 20 years or more to do so. The return required to achieve the pension target can only be achieved by investing in securities (here: investment funds). The returns on traditional annuity insurance policies are hardly sufficient for this if sufficient contributions cannot be made by the time the annuity begins.

Read more detailed information in our interview "Errors in retirement provision"

The pension factor

As no specific pension amount can be guaranteed with investment funds – due to the unpredictable returns of the funds – as is the case with traditional pension insurance policies, however, a certain value per fund credit (usually € 10 each.000 depot value) for a forecast of the possible pension indicated. This value is then called "annuity factor" in the offers. This factor is calculated according to the actuarial principles in force at the time of closing. Since these basics (u.a.However, as the actuarial interest rate, surpluses and life expectancy change continuously, the pension factor must be recalculated at the time the pension starts according to the insurance terms and conditions and then used as the basis for determining the pension amount from the start of the pension.

The offer for a unit-linked annuity insurance (FRV) has an annuity factor of € 33.00 per € 10.000 policy value at the start of retirement at age 67 from. Assuming a fund return of 5% p.a. the value of the policy will end up € 100.000 amount. The insured person can therefore expect a lifelong pension in the amount of € 330.00 per month … if the basis of calculation – as described above – has not changed at the time the pension begins.

Caution "guaranteed annuity factor

"In addition to the annuity factor based on today's calculation principles, "good" fund annuity tariffs also declare a lower value, which even then cannot be undercut – the so-called "guaranteed annuity factor. This takes into account the fact that statistics (mortality tables) show at intervals of several years that people in Germany are living longer and longer and therefore have to receive their pensions for a longer period of time. This ensures that the policy capital is sufficient to pay the then lower pension but longer.

However, the wording of the insurance conditions must now be carefully observed. "Guaranteed" unfortunately often means only "guaranteed under certain conditions". So there are clauses for the insurer to fall short of this "guaranteed value" yet again. What such clauses are worth is up to each consumer to decide for themselves.

For us, such products immediately fall through the cracks in the comparison process of customer consulting.

Only real "guaranteed pension factors" without clauses are reliable

The insured needs a value with which he can calculate his possible pension amount when a certain policy value is reached. If, on top of that, the pension factor has no minimum at all, the insured would have a complete "black box" and would not be able to plan his retirement in any way.

We calculate for our customers all possible annuity values always only with the "guaranteed annuity factor" from policies, which just do not hold any adjustment clauses for this annuity factor ready. Thus, on the one hand, the customer has an annuity value that shows the optimistic case and, on the other hand, with the guaranteed annuity factor, additionally an annuity value that indicates with a high degree of probability his actual annuity amount (always assuming that the fund return is achieved).

As in the example above, the policy has an annuity factor of € 33.00 and thus an annuity amount of € 330.00 if the policy provides a capital sum at 67. Year of life from € 100.000 reached. In addition, a "guaranteed pension factor" of € 29.20 is indicated. A change clause to this factor is not included in the terms and conditions. Thus, the insured can be sure that at 67. receives a lifelong pension of at least € 292.00 if the policy has a capital of € 100.000 achieved.

Higher annuity factor possible

According to insurance conditions, insurers check the annuity factor at the end of the contract in different ways and with different calculation variables. Some insurers guarantee here from the results the highest value as a guaranteed pension factor on. Such adjustment clauses are advantageous for the insured person.

Even if an adjustment below the "guaranteed annuity factor" is excluded, a betterment can however always occur. If the examination of the annuity factor at the beginning of the annuity results in a higher annuity factor, these insurers will then also pay out the higher value.

The most important factor of the annuity factor – the "mortality tables"

In addition to the above-mentioned factors such as actuarial interest and surpluses, the most important parameter for the annuity factor is the remaining life probability of the insured at the start of the annuity. The insurer must know how long the pension will have to be paid to the insured from the start of the pension according to statistical probability. For this purpose, German life and pension insurers make use of so-called mortality tables. For annuities, the DAV (German Association of Actuaries) mortality tables "R" (for annuities) are used. These mortality tables are renewed whenever the life expectancy of Germans has changed significantly. These mortality tables show which persons, of which sex, of a certain age and of a certain birth cohort, will retire at the beginning of the pension (e.g., at the end of the pension period).B. with 67 J.) still how long will live. This allows the insurer to calculate well how high the pension may be for a given capital in order to be able to pay it (on average) also for life. This type of mortality table (generation table) takes into account the dynamic trend that we Germans will become older and older in the future.

The most common is currently the mortality table DAV 2004 R. If insurers are still using older mortality tables, caution is advised. The pension calculations with older mortality tables show a too high pension, because residual life probability of these (older) mortality tables is not as high as in reality today.

However, there are definitely different types of "mortality tables" that take into account different aspects of longevity and mortality probabilities. It should be clear that insurers use the mortality tables that are to their "advantage".