The case for fixed annuities
October 5, 2011 by Jack Marrion
October 3, 2011 By Jack Marrion
A recent study found that when retirees were essentially faced with a coin toss, where if it came up heads they’d win $100 and if it came up tails they’d lose $10, that half of the retirees wouldn’t take the bet–even though the upside is 10 to one. This has strong implications for fixed annuities. The first one is that a significant number of retirees won’t have anything to do with the stock market if they understand that money can be lost. The key here is the retiree understands that there is a risk of loss. You need to ask questions such as “If you had $100,000 in an investment and it was worth $80,000 tomorrow, what would you feel like doing?”
Here’s how you can make the case for a fixed annuity despite your client’s risk aversion.
Half of retirees wouldn’t risk losing $10 to make $100 even if the odds were 50/50.
Another risk-aversion implication is the way that index-linked interest is presented, which may cause a prospect not to buy. If a consumer is faced with a choice of renewing a 1 percent bank CD or getting an index annuity with a cap of 3 percent and a zero percent floor, the consumer tends to look at this as an all-or-nothing gamble: “Since I’m only hearing two numbers–3percent and zero percent–obviously there’s a 50/50 chance that I’ll wind up with nothing.” A way to avoid this is to reframe the equation.
If an index annuity is presented as a gamble where you may get nothing it can kill the sale.
A 1 percent CD yield versus an index annuity with a 3 percent cap means the annuity choice has the potential of earning 1 percent less or 2 percent more interest than the CD. Showing the relative results of the decision means the consumer feels that they won’t wind up with nothing and makes for an easier comparison. The consumer is now thinking, “I could earn 2 percent more or I could earn 1 percent less, two is bigger than one, so the annuity is a better choice” The decision has been changed from a win/lose choice to a win-more/win-less choice.
The strongest message is “this annuity can help you remain independent.”
The study also found the most convincing annuity message is “this product can help you remain independent because the money will never run out.” All in all, around 60 percent of retirees thought the independence and peace of mind that a lifetime of annuity income provides were worthwhile reasons to consider buying an annuity.
