How Differentials in Health Status among Elderly Americans Impact Annuity Valuation

Cassio M. Turra, University of Pennsylvania

Private annuity markets have expanded in the U.S. as a result of population aging and the growth in defined contribution plans. Nevertheless, further increases in the demand for annuities have been hindered by the effect of adverse selection. In this paper I use AHEAD/HRS data and an increment-decrement life table model to examine how health status impacts annuity valuation in the U.S. I start by comparing different health indicators to determine the best predictors of mortality among the elderly. Based on a map of trajectories among states of health I then estimate several money’s worth measures to assess (1) the magnitude of expected transfers among annuity purchasers of different health status and (2) the insurance value of life annuities by health status. Finally, I demonstrate the consequences of changes in mortality and health transition rates for the money’s worth of life annuities.