Recently I read an authoritative research study in which psychologists asked half the people if they thought they would live to age 85 (a positive “framing” of the question) and asked the other half if they thought they would die by age 85 (a negative framing).
The first group said yes more often than the second group said no, so the researchers concluded that people are more optimistic about living longer than if they are quizzed about their life expectancy in a positive rather than negative way.
Since they expected to live longer, the first group was also, on average, relatively more willing to consider buying a single-premium, single-life-only immediate life annuity (an irrevocable contract that converts a lump sum into a guaranteed income stream for one person for life) than the second group.
That was no big surprise. Everyone (especially the actuaries who price annuities for insurance companies) knows that healthy people with parents or grandparents who lived to age 95 or 100 are much more likely to buy annuities than people who smoke or have short-lived ancestors. Indeed, this fact tends to make life-annuity prices about 10% higher than if a mix of healthy and sick people bought them.
But what irked me was that the researchers, like the researchers in most annuity studies, asked the participants if they would buy a single life-only annuity. That’s the kind of annuity where if you get “hit by a bus” only “a day after buying your annuity” the insurance company “gets all your money.”
Such annuities exist-but hardly anyone buys them. Many if not most life annuity buyers-and I hear this from the folks at New York Life, the biggest private seller of immediate annuities, and from TIAA-CREF, the biggest non-profit seller of annuities-hedge their bets by adding a “period certain” or a “cash refund” or “joint and survivor” option to their contract.
Under a “life with period certain” contract, you or your beneficiary get monthly payments for life or for either five, 10, 15 or 20 years-whichever is longer. If you do the math, you’ll discover that 15 years of guaranteed payments will ensure you (or your beneficiary) a return of principal. So will a “cash refund” contract. And a joint-and-survivor option ensures that
income will last as long as either of two people (usually husband and wife) is living.
Unfortunately, journalists as well as researchers have come to characterize all immediate income annuities as the “hit by a bus” type. Year after year, their stories in popular newspapers and magazines perpetuate this misimpression. As a result, lots of people don’t learn how flexible income annuities can be, and never even consider a tool that could make their retirement years much more financially secure.
Written by Kerry Pechter