How do you calculate the Expected Present Discounted Value (EPDV) of an immediate life annuity?
To calculate the expected present discounted value, you’ll need an appropriate mortality table and discount rate. There is tremendous adverse selection in the individual annuity market, so it’s best to make the calculation two ways; 1) the value of the annuity for the average person and, 2) the value of the annuity for the much healthier segment of the population that actually buys annuities. If you’re not blessed with the good health and long-lived genes of the typical annuity purchaser, you’ll end up overpaying for the product relative to its value. The Social Security Administration publishes a Mortality Table that describes the life expectancy for the population has a whole (i.e., the average person.) While every insurance company developes their own proprietary mortality table based on the specific markets they target, this information is not in the public domain. Mitchell, Poterba, et al (Note 2) have done work on estimating the affect of adverse selection in the individual annui
