New Index Scores ‘Annuity Appeal’
October 7, 2014 by Linda Koco
Do annuities have curb appeal? Sixteen percent of consumers think so, according to CANNEX USA. These consumers gave annuities a “high” ranking on a new index that measures the “appeal” of guaranteed lifetime income (GLI) annuity products among consumers.
Twenty-one percent of consumers gave products with GLIs a somewhat lower score of “medium high.” Other score categories were medium (35 percent) medium low (16 percent) and low (12 percent).
This spread in scores is surprising, given the reported popularity of guaranteed lifetime benefits —including income guarantees — in various annuity products over the past decade.
The new index assesses the attractiveness of annuities among consumers in today’s market, said Gary Baker, CANNEX president. “It helps gauge how willing people are to put their assets into an annuity that supports their retirement goals, for instance by buying their own pensions instead of having it given to them by an employer.”
This is the first time that CANNEX and its research partner, Greenwald & Associates of Washington, have taken the annuity pulse this way. They developed the index after surveying consumers about their current attitudes and understandings about GLIs in general and in annuities in particular.
The results should be of interest to advisors, Baker said in an interview, because the index points to the likelihood of consumers purchasing annuity products with GLI features. The higher the index score, the greater is the likelihood that consumers will own or consider purchasing an annuity, the researchers found. The assets that consumers report annuitizing also increase with the score.
Baker did not characterize the index results as good or bad. But he said the results, when viewed in combination with the study findings, provide a window to where annuities with GLI features are making the most waves right now.
About the study
The two firms surveyed nearly 1,100 consumers ages 55 to 75 having at least $100,000 in investable assets.
Many of the findings show that consumers favor the concept of GLI. For example, 56 percent indicated they consider GLI sources, other than pensions and Social Security, to be extremely valuable, and an additional 22 percent considered these other sources to be very valuable, Baker said.
Thirty to 40 percent of consumers named “peace of mind” and “easier to know how much to save” as top reasons for their favorable ratings.
The GLI products and features have strongest appeal among consumers with household assets of $250,000 to $999,999, the researchers found. Women are GLI fans too. For instance, 45 percent of women agreed that GLI products offer peace of mind (versus 33 percent of men). The women/men split was 40/31 on GLIs making it easier to know how much to spend monthly.
But when questions turned specifically to annuities having GLIs, the researchers found that a lot of people are in the dark about such products. The findings point to lack of familiarity and lack of understanding as factors.
When asked about their familiarity with annuities that offer GLI features, for instance, only 22 percent claimed high familiarity with variable annuities having guaranteed lifetime withdrawal benefits (GLWBs). Only 18 percent indicated high familiarity with deferred income annuities, 17 percent with fixed indexed annuities with GLWBs, and 15 percent with immediate income annuities.
What’s more, most indicated they have little understanding of guaranteed income sources other than Social Security and pensions. That lack of understanding extends to annuities. For instance, even after reading descriptions of certain annuity products with GLI features, only 30 percent said they understood an immediate income annuity, only 27 percent a deferred income annuity, and only 25 percent, a variable annuity with GLWB.
Pockets of understanding
The study also found pockets of understanding and interest around annuities with GLIs.
For example, 26 percent of consumers having at least $1 million in assets described themselves as being highly familiar with variable annuities with GLWBs, compared to 20 percent of those with less than $1 million.
Half (53 percent) of those willing to take substantial risk with investments said they understand immediate income annuities extremely well, in comparison to just 24 percent of those who prefer little to no risk.
Also, “consumers who recall their advisor mentioning or recommending an annuity are more likely than other consumers to give a positive evaluation of the overvalue of annuities,” the study said.
What, then, to make of consumers valuing the concept of guaranteed income (as in pensions and Social Security) on the one hand, but zoning out on annuity products offering GLI features?
Personal asset levels can be a factor, Baker pointed out. For instance, 26 percent of consumers having at least $1 million in assets were highly familiar with variable annuities having GLWBs, according to the study. By comparison, only 20 percent of those with less than $1 million said the same.
“If a consumer has at least $1 million in investable assets, it’s likely that this person has been talking to an advisor about something,” Baker said. “Eventually that conversation will touch on investments, and the advisor will probably mention variable annuities as an option.” That can lead to a discussion about guaranteed lifetime withdrawal benefits.
But people who have less than $1 million may not speak with an advisor, or not very often. Or if they do, the discussion might be about other things. For some, depending on income level, “the only advice they get may be the advice from the workplace,” Baker said.
Study of the new GLI Index results may help too. The researchers point out that lack of familiarity with products having GLI, and a general “undervaluing of annuities,” resulted in just 16 percent of consumers getting high scores (89 to 132 points) on the index.
A higher percentage would mean that more consumers would likely to be open to annuities.
The index assigns point values to consumers who: place the highest value on GLI products; report being extremely familiar with various types of annuities; and place the highest value on lifetime income annuity value.
According to Baker, the high scorers are more likely than the lower scorers to have a formal, written financial plan, work with a financial advisor, and recall that their advisor mentioned an annuity. They are also more likely than lower scorers to express a high level of anxiety about various retirement concerns and more likely to consider financial goals important. “They tend to be younger, in better health, have a higher life expectance, or be willing to take some investment risk,” the study added. And they are less likely to want to make investment decisions completely, or almost completely, on their own.
The results suggest that advisors and consumers will benefit when the advisor educates the clients “about how annuities with GLI features make sense, or do not make sense, as part of the portfolio, for instance as a supplement to Social Security,” Baker said.