Massachusetts Law Requires Gender-Neutral Annuities

With little fanfare, S.B No. 2729 (the “Act Relative To Equitable Coverage For Annuity Policies”) went into effect on January 1, 2009. The law requires that all annuities sold to Massachusetts residents be gender-neutral in all aspects, including premiums and benefits.

An annuity can take a variety of forms, but it’s basically an insurance contract.  In a fixed annuity, an insurer agrees to make a regular stream of payments to an annuitant in return for the payment of an initial sum of money (the premium).  The period over which fixed annuity payments are made could be

a specific number of months

over the life of one or more annuitants

based on some combination of these two conditions.

As example of the third situation, an annuity might provide that the payments are made for the life of the annuitant or for at least 10 years if the annuitant does not live that long.  In this case, if the annuitant dies before 10 years of payments have been made, the remaining payments would go to a specified beneficiary.

In cases where payments are contingent on the life of one of more annuitants, the sizes of the premium and the corresponding payouts are based on life expectancy. This is the area where the new law’s impact will be felt.

In the general population, women tend to live longer than men. Normally, life insurance policy premiums for a woman are lower than premiums for a man who has the same age and health circumstances.  In the case of an annuity paid out over the expected lifetime of the annuitant, it would normally be the case that for a woman, the payout would be lower than for a man of the same age. Since women, on average, live longer than men, the insurance company can expect to pay money out over a longer period of time, so in order to pay out the same total amount (on average), the monthly benefit is lower.

According to Kim O’Brien, executive director of the National Association for Fixed Annuities, the innate differences in mortality between men and women are such that a requirement for gender-neutral annuities causes “significant economic inefficiencies.” Insurers won’t like this law, because it will force them to change the pricing of annuities for both men and women in Massachusetts.  Women’s annuity costs will decline and men’s will rise relative to the costs in states where annuities are priced according to sex-based differences in mortality rates.

I fired up an annuity estimator at the Fidelity Investments web site to examine the impact of the law on an annuity payout.

First I calculated the payout of a simple fixed annuity based on the life of a 70-year-old annuitant who invests $100,000 in an annuity contract.  In order to see what the situation would be outside of Massachusetts (or Montana – the only other state with a similar law), I told the estimator that the annuitant lives in California.  For a male annuitant, the annuity would pay $756/month; for a female, the payout would be $680/month.  Doing the same calculation for a Massachusetts resident, the estimator indicated that the payout would be $698/month irrespective of whether the annuitant is a man or a woman.

A probable outcome of the law is that some smaller insurers will cease to sell annuities in Massachusetts. Curiously, the law doesn’t address the cost of regular life insurance policies, so women’s life insurance premiums will remain cheaper than those for men.

About the author

Thomas Fisher, CFP®

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