Although many institutions that have offered CGAs to donors are concerned about the natural extension of life expectancy, or that a large number of female CGA donors could offset the life expectancy experience–increased longevity has not been the major factor of CGA failures.
Earnings on investments have had a greater adverse effect on the profitability of CGAs for non-profit institutions. Nine years ago, the recommended payout rate for a single 75-year-old annuitant was 7.1%. The suggested rate for an annuitant age-75 since 2012 has been 5.8%, thus a charitable organization issuing an annuity in 2007 would have been paying 22.4% more than issuing the annuity five years later to an age-75 annuitant. In determining suggested rates, earnings were assumed to have decreased by 17.6% (some would suggest conservative investments have diminished even further).
The issuer of the annuity has a fixed annual payout to the donor made when earnings expectancy was higher. Is this a risk that is appropriate for a non-profit institution?
The only safe method for charities using CGAs is to re-insure the obligation with a highly-rated insurance company.
1. Eliminate investment risk
2. Eliminate mortality risk
3. Obtain profit up front
4. Reduce administrative costs