Economists have long wondered why more people don’t buy annuity products when their benefits make great sense in retirement planning. Two marketing professors from Boston College recently researched why annuities aren’t more popular and their answer is actually rather surprising. James R. Hood summarized the findings in the Consumer Affairs article “Researchers find out why Americans don’t buy more annuities.” The researchers found that in short, Americans don’t buy annuities more often because they just don’t like to think about dying. Annuities are contracts with insurance companies that pay you income installments for as long as you live after an up front investment or multiple inputs. They protect you against longevity risk by ensuring that you never run out of money for the rest of your life. This particular benefit makes it seem logical that more people would want to buy these annuities and ensure that they don’t run out of money in their old age. So what gives?
The problem, according to these marketing professors, is that the process of purchasing an annuity makes you think about your own death. You have to think about how many years you have have left to live in order to determine how long you need income coming in and in order for the insurance company to determine the amount of your annuity payments. Americans often stay away from annuities because buying an annuity forces you to think about your own death. Annuities aren’t the only products that people shy away from because they are avoiding thinking about their own death. This same psychology holds true for life insurance products, wills, and other estate planning tools as well.
Many reasons have been given in the past for why more people do not buy annuities. Some experts have said that it’s because overall retirement savings are low, some believe that the pricing is too high, and others say that people are wary of giving up flexibility and access to their money. The Boston College marketing professors decided to look at the psychological reasons rather than taking the typical economic approach for their research. They found that people use reasoning called ‘mortality salience defense strategy’, which is essentially ignoring something in the hopes that it will go away. Four different studies found this to be the case. People were more willing to roll over their retirement savings into an IRA rather than an annuity because they didn’t think about their own death when considering the IRA. Also, more people chose an annuity in the study when the wording said ‘payments for as long as you live’ rather than ‘payments until you die.’
Unfortunately, the fear of death is keeping people away from a product that could financially protect them if they live a long life. Annuities are a good solution for longevity risk if Americans can get past the fear of dying and consider this valuable tool.
Written by Rachel Summit