Solving The Annuity Puzzle

We’re sharing guidance from the Athene commissioned “Solving the annuity puzzle: A Behavioral Analysis”  to uncover hidden client biases. With these biases revealed, you can reshape the annuity conversation toward confident and informed decisions.

The Annuity Puzzle

An annuity grants consumers the ability to trade part of their retirement savings for payments over the remainder of their lives.

 In a recent survey, 70% of respondents stated that receiving a monthly paycheck during retirement was important to them, even though just 13% of working-aged Americans had purchased an annuity. The fact that consumers don’t purchase annuities even when it’s in their rational self-interest to do so is called the "annuity puzzle."

Four Behavioral Biases and Possible Solutions

Below we’ll explore some common behavioral biases and how you can address them when presenting annuities to your clients.

Longevity Uncertainty

  1. Avoidance Bias: In an effort to manage fear of death, people tend to avoid thoughts of their own mortality.
  2. Risk Aversion Bias: Consumers may feel loss aversion when it comes to annuities as a risk because they’re unsure whether they’ll recoup their initial premium.

Solutions: Avoid mentioning death and frame annuities as “enhanced financial protection.” For example, annuities can insure your clients against outliving their money; unlike other financial vehicles, they provide a less-volatile stream of income.

Spending Uncertainty

  1. Future Discounting Bias: Consumers may disregard the resources they’ll need for post-retirement consumption in order to consume presently.
  2. Wealth Illusion Bias: People tend to view lump sums of money as better than equivalent monthly annuitized streams of income.

Solutions: Strengthen clients’ emotional bonds to their future through a narrative where they visualize their future selves.

Investment Outcome Uncertainty

  1. Unrealistic Self-Management Optimism Bias: People tend to believe they have control over chance events, that the future holds more favorable attributes for them, and that negative events are less likely to affect them.
  2. Avoidance Bias: Belief of what the future may hold based on recollection of recent events. For example, if the stock market is doing well, people think it will continue to do well.
  3. Distrust in Financial Institutions: The Great Recession gave consumers a lack of trust in financial institutions.

Solutions: Market annuities as insurance rather than financial vehicles and build consumer trust by emphasizing proficiency.

Decision Uncertainty

  1. Financial Illiteracy: Consumers are less likely to act when they feel uncertain or uninformed.
  2. Choice Overload: The difficulty to make a decision exponentially increases as the number of choices increase.
  3. Inertia: Procrastination and forgetfulness in the purchase process.

Solutions: Simplify your presentation of information and create timely reminders to avoid procrastination.

Understanding behavioral tendencies around decision-making can help you find a suitable solution to meet clients’ needs. For more information on how DMI can help you grow your business, visit us online or call (866) 322-3684.

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