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Annuities as an Asset Class for Fee-Based Advisors l 22 © Envestnet 2022 The income annuity payout is based on objective mortality statistics rather than subjective fears. The case for an income annuity becomes stronger for individuals more worried about longevity. Such individuals may value income annuities at more than their fair price. For instance, if my life expectancy is 85, but I build a financial plan to work until age 95, adding an income annuity to the plan will improve my funding status. The present value of the annuity payments is greater when I plan to live to 95, because the annuity is priced with objective mortality data where people do not live that long on average. The income annuity provides risk pooling and mortality credits that individuals cannot create on their own. Just because money's worth measures imply underlying costs to the owner does not necessarily mean that annuities are a bad deal for anyone who experiences longevity risk aversion. For example, a $100,000 premium may be quoted as supporting $600 per month for life. Without any built-in fees, perhaps the fair monthly income could have been $610 or $620. This reverse engineering process lets one estimate the costs built into an income annuity. If an income annuity provides $600 per month, but we simulate that a fair price is to provide $610 per month, then the money's worth of the annuity is $600 / $610 = 0.9836. In this case, the commercial annuity pays 1.64 percent less than the fair price. We could interpret this 1.64 percent as an upfront transaction cost or one- time fee for purchasing the annuity. At the same time, perhaps the household could not invest for as much yield as the insurance company or might have an unusually long expected lifespan, such that a more personalized fair monthly income is only $580 or $590. In this case, the annuity provides a great deal. These matters are not transparent. We must calculate the actuarially fair price for an annuity and then compare it to the actual price. Then we have a better sense of the "money's worth" from the annuity. If my life expectancy is 85, but I build a financial plan to work until age 95, adding an income annuity to the plan will improve my funding status. The present value of the annuity payments is greater when I plan to live to 95, because the annuity is priced with objective mortality data where people do not live that long on average. 85 88 90 95 © Envestnet 2022

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