Annuity Framing Matters

Written by: Nick Curabba

Here is an interesting post from Tim Burnes, blogger at Fiduciary Investor, about the virtues of deferred retirement annuities. Also known in some circles as "longevity insurance," these are annuity products designed to guard against the risk of extreme old age.  The concept has some supporters (some life companies even sell them), and federal legislation to make longevity insurance more attractive to 401(k) participants has been kicking around for a few years. 

We wanted to highlight one aspect of the Fiduciary Investor piece that was especially interesting.  According to this recent study by Jeffrey Brown, Jeffrey Kling, Sendhil Mullainathan, and Marian Wrobel, people are more willing to consider annuities if they are presented in the right context.  The authors make the point that annuities are best sold as consumption, rather than an alternative investment, and should be discussed in the context of planning for decumulation, rather than asset accumulation. 

If their conclusions are right, they validate the on-going efforts of the insurance industry to educate policymakers and the public about the true insurance aspects of annuities.  People don't generally consider premiums on their homeowner's insurance to be a "bad deal" unless those premiums are recouped, with interest.   Burns suggests that annuities should be thought of similarly : "It seems likely that a partial annuitization would more easily be framed and accepted by individuals as an insurance or consumption decision where the payment is akin to an insurance premium rather than a capital investment."