Removing roadblocks to choosing annuities

Seven in 10 Americans told a TIAA survey that receiving a guaranteed monthly paycheck during retirement is important. But only 13% of those responding to the survey said they actually purchased an annuity. So what hurdles must advisors help consumers overcome in order to make the annuity decision? 

During a recent National Association for Fixed Annuities webinar, Patti Hausherr, vice president sales strategy leader with Athene, examined some of the reasons why consumers don’t buy annuities and how advisors can guide them.

Hausherr listed several reasons why Americans don’t buy annuities:

• A belief annuities are overpriced.
• Risk aversion around inflation.
• Concern about leaving a legacy.
• A belief that there is a better way to insure against longevity. 

In addition, four uncertainties play into the reluctance to purchase annuities. Hausherr described them as:

1. Longevity uncertainty. 

How long will I live? “Some theorists have suggested that this is the central question driving annuity purchasing decisions,” she said. “If a consumer believes that they will have a longer than average life expectancy, then figuring out how to have guaranteed income in retirement is viewed as an important problem.”

Hausherr said that the way advisors ask clients about longevity has much to do with the way clients answer. 

“If I were to ask you how long you think you’ll live, the chances are good that it will be longer than if I asked you when you think you are going to die,” she said, pointing to a study that showed about a 10-year difference between the age that people think they will live to and the age that people think they will be when they die. “If you’re looking for a longer life expectancy answer, ask your clients what age they think they will live to.”

Many investors also experience extreme aversion to a negative return on their investment, Hausherr said. 

“So even if consumers do things like think about their life expectancy, and even if they make a very accurate assessment, they may be deterred from purchasing an annuity by a tendency toward what we call extreme risk aversion,” she said. “This concept of loss aversion to the prospect of potential losses has a much greater impact on decision making than equivalent gains. The thought of losing $100 is much worse than the thought of forgoing a gain of $100. So for many consumers, the decision to purchase an annuity may boil down to the question of whether one will really live long enough to recoup their initial deposit, and consumers may view annuities as risky gambles.”

Because of loss aversion, a potential loss if they die earlier than expected may have a greater impact on consumers’ annuity purchase decision than the possible gains if they live longer than expected, she said.

To overcome the longevity uncertainty bias, Hausherr recommended advisors avoid any mention of death and describe buying annuities as buying peace of mind instead of buying an income stream.

She also recommended framing annuities as purchasing enhanced financial security instead of making an investment. Use words such as “enhanced financial security,” “protected lifetime income” and “security.”

“Talk about potential benefits of any strategy you want to put forth. That will resonate with clients more than talking about features,” she said. “Connect the potential benefit to the client’s personal goal.”

2. Spending uncertainty. 

People don’t know how much money they will need to cover the length of time they will live. “People are not comfortable predicting what their future expenses will be,” Hausherr said. “Being able to accurately figure their income needs is challenging.”

She said two biases amplify spending uncertainty: the tendency to sharply discount the value of future consumption, and the propensity of seeing a lump sum as being more adequate than an equivalent and annuitized stream of income.

“We want to talk to clients about the benefits they will experience later in terms of their goals,” she said. “And also remember that you need your clients to see you as not only the one who’s going to help them accumulate their assets but also the one to help them distribute them.”

Consumers are likely to save more for retirement when they can visualize their future, Hausherr said. “Asking open-ended questions and talking about their future can help clients get there. Resurfacing their personal goals and making them the starting point of every conversation can be critical.”

Hausherr suggested advisors help clients overcome spending uncertainty by leading them to estimate their expenses in retirement, adjusting those expenses to inflation and connecting the future benefit to life in retirement.

3. Investment outcome uncertainty. 

Clients are unsure how they would benefit from an annuity as opposed to another retirement product. “Behavioral research finds that people tend to be overly positive about outcomes, especially when it comes to themselves. Client optimism is good but so is security,” Hausherr said. “Clients want and need both.”

In addition, she said, many consumers express excessive optimism toward their ability to manage their own finances. This optimism is exacerbated when recent market performance has been good.

To help clients overcome investment outcome uncertainty, Hausherr recommended advisors educate them about long-term market ups and downs, sequence of return risk, and managing the risks of inflation, longevity and market volatility in retirement.

She also recommended advisors present annuities as a strategy instead of a solution, suggesting using the following language with clients:

“I’d like to show you a strategy that can provide you with protected lifetime income to help cover basic, needed expenses in retirement. Allocating a portion of your assets to generate reliable income can contribute to your personal goal of having security in retirement.”

4. Decision uncertainty. 

Clients are unsure whether they understand annuities enough to make the right decision. “Many view annuities as complex financial instruments,” Hausherr said. “Choice overload also impacts the ability to make a decision.”

Decision uncertainty is amplified by financial illiteracy, she said. In addition, choice overload leads to inactivity. 

To help clients overcome decision uncertainty, Hausherr said advisors should be more perceptive of their clients’ understanding of financial instruments and educate them accordingly. In addition, advisors should use simple language in discussing annuities and ask clients more questions with the aim of narrowing down the options to consider.

She also suggested advisors ask thought-provoking questions, understand and clarify clients’ personal retirement goals, and connect the potential benefits of a strategy to achieving those goals.

“Remember, less is more, and we want to ask good, open-ended questions and listen with discipline,” she said.

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected].