Impaired Life Annuities

Impaired life annuities integrate the health of the individual upon whose life the annuity is written. Medical Directors at the various life insurers review the medical history of the life to be insured and apply a rating to that life when they view the condition of the individual as substandard. This rating is then translated into an “artificial aging”.

For example, a medical underwriter may view a 65-year-old male who suffers from diabetes and hypertension as having the same life expectancy as a 70-year-old male. This means that when the monthly payment from any given amount of capital is calculated, or vice versa, the medical underwriting side of the life insurer is instructing the actuarial side to view the individual as older, and having a shorter life expectancy. Since life annuities are calculated on exhausting principal and interest over the life expectancy of the individual, the older the individual, the greater the annuity payment.

Some impairments are extremely aggressive: I have seen a four-year-old child rated +68 years to make her actuarially 72 for annuity purposes. One can immediately see that it costs a lot less to produce monthly income for lifetime care for a 72-year-old female than for a four-year-old female.

This substandard underwriting is not offered by all life insurers and can vary from one life insurer to another depending on the life insurer’s experience, or lack thereof, with the particular illness.

The structured settlement is the only investment that delivers tax-free damages based on market interest rates, but with the unique health and life expectancy of the individual factored into the calculation. The impairment is beneficial to the defense and to the plaintiff because it shifts the calculation of the mortality to the life insurer. Once the life insurer has granted the substandard assessment, it is required to pay for the life of the individual even if the life expectancy turns out to be normal.

Note: This can be considered if you are purchasing an annuity with your own funds and your health is not normal.