Substandard Annuity

Substandard annuities offer higher monthly payments for individuals with health conditions that shorten life expectancy. Through medical underwriting, these annuities increase income to provide financial stability in retirement.

Key Facts About Substandard Annuities

1. Substandard annuities are similar to single premium immediate annuities but require medical underwriting.
2. To qualify for a substandard annuity, you must submit medical information to qualify for an “age rating,” determining how much your payments will increase.
3. Medical conditions that may qualify you for a substandard annuity include Alzheimer’s, cancer, diabetes, muscular dystrophy and Parkinson’s.

For those with health challenges, substandard annuities can maximize retirement income by offering larger, guaranteed payments based on a shortened life expectancy. But first, it is important to understand how they work and what makes them unique.

What Is a Substandard Annuity?

A substandard annuity, also known as an impaired risk annuity or age-rated annuity, is a type of annuity that pays out a higher monthly payment for people with certain health conditions.

These are important because most annuity customers are generally in good health and have a relatively high life expectancy. In fact, a primary goal of purchasing an annuity is creating a guaranteed income stream to address the risk of running out of money in retirement.

But what happens if you do not have perfect health? That is where substandard annuities can help. Those who are not in good health can still benefit from the predictable income of an annuity when they purchase a substandard annuity. These annuities offer people with health conditions and shortened life expectancies the opportunity to receive guaranteed payments like a traditional annuity.

The substandard annuity works much like a single premium immediate annuity (SPIA) and has many of the same benefits and drawbacks. When you purchase a substandard annuity, the insurance company converts your lump-sum premium into a stream of income that begins within a year.

The biggest difference between substandard annuities and traditional SPIAs is that substandard annuities require medical underwriting. To qualify for these annuities, customers must submit medical verification of certain health conditions.

While many people may avoid or hesitate to undergo medical underwriting for life insurance, medical underwriting can be to your own benefit in the case of substandard annuities. The more advanced your medical condition, the more likely your payments will be accelerated.

This can be particularly advantageous for individuals anticipating a future need for professional or nursing care, providing protection for their assets while maintaining a steady, guaranteed income that will not be depleted by large medical bills.

Typically, SPIAs calculate a person’s annuity payments through actuarial tables that estimate the average life expectancy based on different ages and sexes. The longer the insurance company expects you to live, the longer they expect to pay out your annuity, and the smaller your payments will be.

If you can prove to an annuity provider that your life expectancy is likely to be shorter than the average person of your age and sex due to a health condition, then they will increase the amount you will receive in each payment. This is what is known as a substandard annuity.

Counterintuitively, the medical underwriting necessary for the substandard annuity is meant to demonstrate a lack of health. This is the opposite of the purpose of underwriting for life insurance where you are aiming to show how healthy you are to achieve a low premium payment. If you are too healthy, you will be rejected from the substandard annuity type and will end up with a normal income annuity, and lower monthly payments.

Stephen Kates, CFP®Principal Financial Analyst for Annuity.org

Stephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for Annuity.org, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.

Substandard Annuity Age Ratings

When you complete the medical underwriting process for a substandard annuity, your annuity provider will give you an “age rating” that can be used to determine your life expectancy. The age rating you receive determines how much your annuity payments will increase over what a traditional annuity would pay.

For example, a 64-year-old with a disease such as emphysema might receive an age rating of 70. In this scenario, the provider will calculate annuity payments for that 64-year-old based on the life expectancy of a 70-year-old.

To illustrate how age ratings affect substandard annuity payments, the table below shows the monthly income that a 65-year-old male might receive from a $100,000 substandard annuity based on different age ratings.

Monthly Income for $100,000 Substandard Annuity

Rated Age	Monthly Income	Increase Over Standard Annuity
65	$680	–
66	$697	2.4%
67	$714	5.0%
68	$733	7.8%
69	$753	10.7%
70	$774	13.9%

Qualifying for a Substandard Annuity

To qualify for a substandard annuity, you must have a medical condition that could shorten your life expectancy. Not every condition will qualify for medical underwriting, and some providers may recognize medical conditions that others do not. 

Some examples of medical conditions that may qualify someone for a substandard annuity include:

• Alzheimer’s
• Alcoholism
• ALS (Lou Gehrig’s disease)
• Cancer (except basal cell)
• Chronic Hepatitis/Hepatitis C
• Congestive heart failure
• Cirrhosis of the liver
• Diabetes
• High blood pressure
• Injury due to a fall or muscle imbalance
• Leukemia
• Mental illness
• Muscular dystrophy
• Organ transplant
• Paraplegia or quadriplegia
• Parkinson’s disease
• Renal failure
• Stroke

Source: Broadridge Advisor Solutions

If you have one of these conditions, it might not make sense to purchase a traditional annuity because you are less likely to receive the full value of your annuity. However, a substandard annuity can increase your monthly income, so you can maintain your lifestyle in retirement even if you have a lower life expectancy.

Editor Bianca Dagostino and Writer Lena Borrelli contributed to this article.