Product bundling, information key to annuity, LTCi purchases, studies show

Image of an older couple reviewing documents.

By Steven A. Morelli

It’s no secret that people are going into their senior years and retirement with fewer pensions and protections against the financial ravages of old age, but the mystery is why so few protect themselves with insurance products.

Research has had few satisfying answers as to why people don’t acquire annuities, long-term care insurance and reverse mortgages. These products can protect against health care and other expenses that typically ravage savings in later years and during retirement. A recent study looked into the usual explanations, found some clues explaining the low uptake of these products and one promising solution.

The paper “Longevity, Health and Housing Risks Management in Retirement,” by Pierre-Carl Michaud and Pascal St. Amour published this month by the National Bureau of Economic Research, was based on research done on Canadians between the ages of 60 and 70.

With fewer private pensions and defined benefits for workers, more people are going into their retirement years with only their public pension and their own resources. The good news is that housing has been a good investment over the decades, although people can end up needing that equity during rare down real estate markets.

Low acceptance cited for LTCi, annuities

Nevertheless, annuity purchases, LTCi (long-term care insurance) purchases, and reverse mortgages (RMR) have a relatively low public acceptance.

“Indeed, both RMR and LTCi instruments have proven remarkably unpopular with take-up rates even lower than the already low take-up for annuities,” according to the paper. “More fundamentally, post-retirement asset decumulation remains unabatedly slow suggesting that households prefer to maintain precautionary financial and residential wealth reserves to offset longevity and morbidity risk exposures, remain at own home as long as possible, and guarantee that eventual bequest objectives are met.”

A key reason for consumer indifference to these insurance products is low relative risk aversion: “Moderate aversion largely explains the low appetite for insurance procured by annuities (against longevity risk), by LTCI (against long-term care expenditures risk) and by RMR (against downwards house price risks).”

Beyond that, information “frictions” and behavioral status-quo biases also depressed demand for these insurance products, according to survey analysis.

One strategy that seemed to work was bundling products. Demand for annuities doubled when reverse mortgages can be used to annuitize home equity.

“Our results indicate that demand is responsive to packaging,” according to the report. “Allowing for decisions over product bundles, instead of independent choices particularly benefits annuities whose take-up rates almost double (28.9% to 51.8%).”

The key strategy was using a reverse mortgage to buy annuities, rather than using the home equity for consumption expenses.

Information key for insurance product purchases

A recently released American study showed that retirees realize that they are in a financial jam and they regret not having sufficiently saved early. In particular, once they were made aware of their longevity risks, the study respondents regretted not having purchased LTCi and annuities, according to the paper, “Financial Regret at Older Ages and Longevity Awareness,” by Olivia S. Mitchell, The Wharton School, and Abigail Hurwitz, Hebrew University of Jerusalem.

The researchers pointed out that previous studies showed that an underestimation of longevity was a key reason for underinsuring against risks in retirement. But this study of 1,764 individuals over the age of 50, average age of 72.5, showed that when a test group was informed about their longevity risks, they regretted not make better decisions.

57% regretted not having saved more.
40% regretted not buying long-term care insurance.
37% regretted not working longer.
23% regretted that they did not delay claiming Social Security benefits
33% regretted not having purchased lifetime income payments.
10% regretted having to depend financially on others.

People with less wealth and education were more likely to regret not getting insurance. But people across the financial spectrum need to take the reins of their retirement finances early, Mitchell said in a Wharton podcast.

“If people don’t start saving for retirement when they’re young, they don’t get to benefit from compound interest and the ability to diversify their investments across a whole variety of different assets,” Mitchell said. “And then they’ll find it very difficult to retire at any reasonable age if they don’t start saving as young as possible. They need to save 20% or more of their income every year.”

The researchers suggested in the paper that the regret at later life indicates that people would make better decisions early on in terms of purchasing adequate insurance products if they had a clearer understanding of their longevity.

“Our results illuminate a major reason older people end up with financial regret, namely because they had inaccurate perceptions of longevity when they made key saving, benefit claiming, and insurance decisions,” according to the report. “This has an important policy implication, in that providing people with objective longevity information when they make key financial decisions could help them avoid making mistakes and hence avoid regret in later life.”

Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected].