Thinking Of Annuities As An Act Of Civilization

Advisors and carriers are facing the challenge of recasting their approaches to annuity sales. In the midst of that challenge, a psychologist urged advisors to think of insurance and risk pooling as an act of civilization and social construct.

Diluting longevity risk across large groups of people and the general account of an insurance company expands the power that insurance provides. That's what psychologist Ken Harman, managing director of the AB Advisor Institute, told attendees at the Insured Retirement Institute's annual conference this week. The AB Advisor Institute is an arm of AB Investments Inc.

Longevity risk is the risk that people will outlive their savings. Annuities offer solutions by providing income that people can’t outlive.

Harman provided a refreshing approach to annuity messaging this week at the IRI's annual meeting, where much of the talk centered on the significance of the 18-month pause in the Department of Labor’s fiduciary rule.

The major parts of the rule have been delayed until July 1, 2019. This delay provides an unexpected window of opportunity for retail advisors to rethink the way annuities are sold and explain to consumers what annuities do and why they exist.

For decades, annuities have been sold narrowly as income products with bells and whistles. But a wider view would help advisors communicate more context for annuities that are going to become a vital part of the solution to the coming retirement crisis, Harman said.

Harman’s father, who is retired, receives three pensions. But the days of receiving pensions are gone for millions of baby boomers who will have to fund their own way if they want to supplement Social Security.

Staking Out the High Ground

A fire insurance policy pools, or dilutes, the individual risk of property loss among thousands of policyholders who pay the premiums. It's much the same concept for annuities, as they guard against individuals outliving assets through a similar risk-pooling mechanism.

Advisors will have a better chance of making people understand annuities if they explain them in the context of risk dilution, instead of being fixated on jargon surrounding individual policy details such as cap rates, index values and guaranteed minimum withdrawal benefits.

“Start the conversation as income insurance, not an annuity,” said Jamie Cox, managing director of Harris Financial Group.

Surveys consistently show that consumers are receptive to retirement income products, but sour when they hear the term “annuity.”

Changing the messaging around annuities to take the “high ground” will help advisors slide more easily into a conversation about annuities instead of bombarding consumers with product choices loaded with features, experts said.

“We need to get out of our own way, and simplify the explanation of what we do,” said Barry Stowe, chairman and CEO of Jackson National Life.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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