Jack Marrion

Life insurance and immediate annuities face a problem in probability perception. Most people, at most ages, think they’re going to live long enough to not need life insurance, but not so long that they will need a life income annuity. In both instances most people are wrong, but it’s tough to deal with perceptions. However, there are several ways to try to offset the effect of misperceptions. Here are two:

Make the Risk Vivid

People usually want to buy life insurance after their doctor says they have a terminal illness, but by then it’s too late. If a person is shown that a risk is real he is more likely to insure against it. An “obituary book,” filled with obituaries of people who died before their time, reminds the individual that bad things happen. If you’re talking about using annuities to fight longevity risk, ask the individual: “Did any of your relatives make it to age 90?” This often starts a memory cascade reminding them of Uncle Phil who made it to age 92, Aunt Fran who lived until age 96, and Uncle Bob, who is still around at age 98. Now, when you talk about how a life income annuity cannot be outlived, the audience will be more receptive.

Another way to increase vividness is to focus on risk aversion. There is roughly a one in 600 probability that a 39-year-old will not see age 40. So ask the person: “Say there were 599 white chips and one black chip in a covered bowl. If you pull out a white chip you get $200—the cost of an insurance premium; if you pull the black chip you die, and your family gets nothing. Will you take this bet?”

A third way is to bring a possible future into the present. It goes something like this: “It’s one month from today and your family is looking at your casket because you didn’t see that drunk driver. Does your family have enough money to survive without you?” or “You beat the odds and you’re still alive at age 85, but you ran out of money and your only alternative is the county old age home. Is there anything you wish you had done differently 30 years ago?”

Make the Cost of Insuring the Risk an Easy Choice

If scientists today pronounced that the effects of climate change could be completely prevented if every adult had at least one beer a day, I’m guessing there would be less discussion about the reality of the issue, because the cost of prevention would be so easy. If an individual feels he is likely to die before age 80 and doesn’t think he’ll need longevity protection—and many people under age 65 believe this to be true (according to the University of Michigan Health and Retirement Study)—you can offer inexpensive uncertainty insurance. Explain that for a cost of 0.85 percent a year on their annuity value they keep open the option of getting a guaranteed lifetime withdrawal benefit.

Or you ask if the prospective life insurance buyer has any goals for  his family. The response might be providing college educations for the children. The return question is, “Will they still be able to go to college if you’re dead?” That leads into the “for the price of a latte a week you can insure your kids’ college is  paid for” presentation.

Since the odds of dying before our later years is slim and the idea of being alive at age 85 or 90 is almost inconceivable, many people tend to underestimate the odds that it will happen to them. A couple of ways to deal with this are to change the misperception by making the risk more vivid or to leave the misperception alone and show how low the cost is to provide  uncertainty (also known as “if you’re wrong”) ­insurance. 

A dozen years ago I was heading back from Los Angeles on a late afternoon flight. The restless gentleman in the adjoining seat asked for a pre-takeoff scotch and water, followed by two subsequent drinks once airborne, and then he wanted to talk. He told me he was a vice president for General Motors (GM) and his job was to fly around and testify in court proceedings in which GM was being sued over some alleged failure of their braking system—he was the GM expert witness on GM brakes; apparently this required quite a bit of travel.

The gentleman was proud to work for GM. He was a third-generation GM employee, was a graduate of General Motors Institute, and had earned his MBA on a GM fellowship. The media buzz at the time was that GM’s market share had slipped below 30 percent for the first time ever and that other domestic car makers were also losing ground, so I tried to say something supportive, such as, “I know these are challenging times, but I’m sure you all will meet the challenge.” His response was, “What challenge? Everything is great.” Sure, their market share was under 30 percent, but when the Buick Rendezvous was launched sales would soar and in no time at all GM would have more than half of the new car market, as they did in the mid-70s. I remembered this plane conversation when GM filed for bankruptcy in 2009.

General Motors’ problem was not falling market share; falling market share was the result of the problems. General Motors had: systemic challenges—the way they did business had not evolved with the times; competitive threats—other car makers were making better built cars that people wanted to buy; and societal/demographic threats in that they failed to see that the up-and-coming generation was not into cars like their parents were. Ultimately, the reason General Motors failed was not high labor costs or foreign competition, but a culture that refused to see what the world had become and simply stuck to the status quo.

The insurance industry is not the auto industry, nor does any carrier out there look like GM. However, just like the auto industry, the insurance industry works as a complex adaptive system—meaning it too faces systemic, competitive and societal/demographic threats. The difference is that this industry recasts itself to meet these threats. When captive agency costs became too big a drain, the industry redid distribution to rely on managing general agencies and marketing organizations to train and manage agents. As consumer financial needs broadened beyond life insurance and annuities, many agents became securities registered so they could offer more solutions, and carriers added broker/dealers. In recent years index annuity and life carriers have adapted by making products leaner and adopting new interest crediting methods that work in low interest times. Many agents have shifted to a more profitable mix of business—some deconcentrating on health insurance and putting those efforts into more profitable life and annuity sales. These adaptations are not universally true for all. There are carriers, agencies and agents that cling to the status quo because that is what they know and, sadly, many will suffer the fate of GM. What one needs to do on a regular basis is to imagine a challenge has happened and whether the business model can be adapted. Here are three very real current threats—how would you deal with them?

 • It is ruled that all financial products must be sold using a fiduciary model; one consequence is commissions are no longer paid on annuity or life insurance sales.

 • Interest rates spike by 5 percent within the next four years, causing existing bonds to incur big losses and making both annuity and life insurance renewal rates uncompetitive, leading to mass policy surrenders.

 • The cash buildup within both deferred annuities and cash value life insurance is made taxable; the federal tax advantage is taken away.

While none of these events is likely to happen, they could. It is human nature to resist change because the status quo is comfortable, but threats like these to the status quo are ongoing. Fortunately, unlike GM, the insurance industry has adapted and faced past challenges, but it must be ever-vigilant. The recommendation is to look at every possible threat and react to challenges—even if seemingly unrelated—and ask, “If this happens, what would be the effect on my business, and what can I do about it? This task is not simple, but it is necessary. 

The author would like to thank Jeremy Alexander and Monika Hunsinger of Beacon Research for allowing access to their comprehensive store of annuity sales data and granting permission for a portion of this research to be shared.

Data for this article was drawn from the Beacon Research “Fixed Annuity Premium Study,” the only ongoing study to report and analyze U.S. fixed annuity sales at a product level. The study reports sales data provided quarterly by participating insurance companies as well as results reported in statutory filings and other publicly available sources. Beacon checks this data for general reasonableness, but does not perform independent audits. Beacon uses this data to estimate overall sales and sales by product type.

Beacon Research offers a suite of products to access industry leading annuity data mined from industry filings, researched from company websites, collected from annuity issuers and rigorously quality-checked by experienced data analysts and issuing companies. Beacon Research provides the most comprehensive and accurate fixed and variable contract and sales data in the industry. They can be contacted at 800-720-3504 or on the web at www.beaconresearch.net.

Overview

For calendar year 2013 estimated U.S. fixed annuity sales were $78.1 billion, up 16.6 percent from 2012. The reasons for the growth were threefold: 1) bank rates on money market accounts and certificates of deposit continued to be miserly, 2) the attractiveness of guaranteed lifetime income to boomers resulted in increased deferred income annuity sales as well as strong sales of guaranteed lifetime withdrawal benefits on fixed index annuities, and 3) bond yields moved up sharply in the second quarter, making annuity crediting rates more attractive. After declining for three straight quarters, second quarter fixed annuity sales jumped 14.6 percent over first quarter 2013 sales, third quarter sales leaped 31 percent on top of the second quarter, and fourth quarter sales were 4.7 percent higher than those of the third. All in all, fourth quarter 2013 sales were 45.2 percent higher than fourth quarter 2012 fixed annuity sales.

Fixed index and fixed income annuity sales set new records in 2013. (See Chart 1.) Fixed annuity sales were $38.7 billion, while fixed income sales were $11.0 billion—the first double-digit billion year ever. Fixed rate annuity sales, both non-MVA and MVA (market value adjustment) were $28.3 billion, sharply up from the $23.6 billion of the previous year, but far below the record year of 2008, when a combination of falling bank rates, stock market turmoil and strong multi-year guaranteed annuity yields resulted in $71.6 billion of fixed rate annuities purchased.

Product Trends

For a product that didn’t exist three years ago, deferred income annuities (DIAs) had a strong 2013 posting of more than $2.1 billion in sales. Indeed, the New York Life Lifetime Income Annuity was the second top-selling fixed annuity and only missed first place by a smidge. However, the impact of the DIA product is greater than the numbers represent. DIAs have caught the imagination of the financial media, and for the first time many are suggesting that both immediate annuities and deferred annuities—in the form of DIAs—have an important role to play in retirement planning. In spite of the lowest life payout factors ever, immediate annuity sales are posting strong gains. (See Chart 2.)

Fixed index annuities (FIAs) suffered sales slippage in the last half of 2012 and early 2013, but strongly rebounded as rising bond rates enabled interest caps to be increased last summer. The end of the year sales were further helped by the introduction of new indices used to calculate credited interest, and this resonated well with agents. In addition, the lifetime withdrawal benefit riders available on many FIAs guarantee growth of a future income that cannot be stymied by the next economic downturn. These peace-of-mind features continue to attract buyers.

Interest Rate Trends

Fixed rate annuity sales were also helped by rising bond rates, and when bond rates resume their upward trek, fixed rate sales will continue to strengthen. However, sales will be more affected by what is happening in other interest-yielding categories.

From 1981 to 2011, long term bond yields fell from 13 to 3 percent, and this 10 percent decline produced very strong returns for bondowners. However, when overall bond yields go up, the value of existing bonds goes down. In 2013 the only bond groups that had positive years were junk bonds and very short maturity bonds. It is obvious that the next 30 years will produce lesser returns because bond yields cannot fall to a negative 7 percent, even if interest rates stay the same. It is much more likely we will have a rising interest rate period. If we have a period in which bond values are declining, there is merit in transferring the risk of principal loss to the insurance company and buying an annuity that protects both principal and interest credited. (See Chart 3.)

In every previous interest rate cycle, short term interest rates have responded more quickly than long term rates. Since annuity rates are derived from long maturity bonds and rates paid on bank savings come more from short term lending, this means bank rates go down faster when rates are falling, giving annuities a competitive advantage, and go up faster when rates are rising, causing problems for annuities. However, this time around even though bond yields have spiked since the spring of 2013, the average rate paid on a certificate of deposit declined. 

Why? The main reason is that the 2007-2008 financial crisis caused regulators to pass new rules requiring banks to keep higher reserves so they would be less leveraged. Money kept in reserves dilutes returns, meaning less money is available. The other factor is that over the last 15 years banks added on a number of customer fees, and over the last couple of years regulators have either ended or put limits on the fees that can be charged. Both of these events mean banks have less money to pay out as interest. The final reason for flat bank yields is that customers are not fleeing the banks. Quite the opposite, the amount in money market accounts is at record levels despite low rates.

As bond rates increase, the value of existing bonds will go down, bank yields will be flat or barely budge upward, but fixed rate annuity yields will increase. The competitive position of fixed rate annuities will continue to improve, and this will drive increased sales.

Best Selling Products by Channel

The top 10 selling products in the independent channel space are all fixed index annuities, as are eight of the next group of 10 top selling products. In the bank channel, the top two products are fixed rate (non-MVA) as are three other annuities in the top 10. Also in the top 10 for the bank channel are four FIAs and one fixed income annuity.

The list of top selling annuities in the wirehouse and broker/dealer (BD) space depends on how you define the channel. Looking solely at the wirehouse space, the top selling product was the FIA Pacific Life Pacific Index Choice; in the regional broker/dealer column the top selling product was also the Pacific Life Pacific Index Choice. However, in the large regional broker/dealer segment, the New York Life Secure Term MVA Fixed Annuity was the top seller, and no FIA made it to the top ten. In all securities representative channels, fixed income annuities were well represented in the top ten.

Distribution Trends

In 2013, captive and independent agents were responsible for 60.1 percent of fixed annuity sales, banks did 23.4 percent, wirehouses and broker/dealers contributed another 12.5 percent, and direct sales were at 4 percent. All in all, not terribly different from how the pattern looked in 2010, 2011 and 2012—with banks still off the 30 percent-plus share they held in 2008 and 2009. However, one product showed a distinct trend. The bank share of fixed index annuity sales rose 62 percent from 8.1 percent to 13.1 percent. The bank FIA market share more than doubled from 2010, with actual sales increasing 160 percent. There are two main reasons for the increase. (See Chart 4.)

One reason is the one stated previously—the rates paid on bank CDs continue to be very low relative to the interest potential of an FIA, combined with little downside. If a saver moves money from a CD yielding 0.3 percent to an index annuity with a 3.0 percent interest cap and the index goes down, the opportunity cost of moving from the CD is only 0.3 percent, but the upside is earning ten times more interest in the annuity. The other, perhaps more important reason is that FIAs have lost any taint they might have had in years past. FIA products today have shorter average surrender periods and more consumer-friendly features than a decade ago, and stories of FIA sales abuses are few and far between. My conversations with banks indicate they feel comfortable with offering the products.

As mentioned, fixed income annuity sales have held steady or increased in all channels except one. A decade ago independent agents sold half of the immediate annuities; in 2013 their market share was 11.2 percent. A major reason for the declining share was increased selling by other channels—primarily captive agents—but I believe the other reason for the decline in independent agent immediate annuity sales is that they are selling deferred annuities with lifetime withdrawal benefits instead. (See Chart 5.)

The Forecast

The result of rising bond rates was significantly improved index interest caps and better fixed rates. This pattern will continue in 2014, with overall bond rates gradually increasing and 10-year treasury rates having a more volatile ride as the spread continues to decline between treasury and high-grade corporate bond yields.

The bull market is nearing an end. This is the fifth longest bull market in more than a century. From March 2009 to early May 2014 the S&P 500 is up 178 percent, the Dow is up 153 percent, and the NASDAQ is up 224 percent. The S&P 500 and Dow are roughly 16 percent higher than their previous peak, and NASDAQ is 45 percent higher. There will be a bear market; the only question is how bad will it be. When the bear market does happen it will be even more difficult to disparage a financial tool that didn’t lose money when others did.

The forecast for 2014 is higher rates, higher caps, higher sales and more product innovation. 

Wall Street likes their computer models. The problem is that humans are not computers, and so the results of these models are often worthless because they are ignored. Here are two stories:

Wall Street’s retirement income model says retirees should withdraw a “safe” percentage of their assets each year and adjust the payout based on inflation. The initial payout percentage is based on both the expected returns of the assets being withdrawn from and the rate of future inflation assumed. Let’s pretend Wall Street can predict future returns. That still leaves us with two problems. One is that basing a payout rate today on the expected rate of future inflation is a fool’s errand because there are far to many factors affecting the inflation rate—it cannot be predicted. The second problem is that retirees do not increase their annual withdrawals at the rate of inflation.

The crystal ball models use recent inflation history as their guide. However, a model that assumes a current payout based on a 3 percent future inflation rate could provide a much higher initial payout if actual inflation is 1 percent, and a much lower initial payout if inflation is 5 percent. Even if you think you can predict market performance, you still can’t predict inflation, so your initial payout assumption is inherently flawed. In any event, recent studies have found that retirees ignore these Wall Street models anyway and do not increase their payouts as inflation occurs. Instead, they decrease their purchases—they also decrease their elective expenses as they age, regardless of inflation. The reality is due to the way retirees actually use their assets in retirement—sticking with the initial withdrawal dollar payout and not increasing it—that initial payouts should be significantly higher. As an example, assuming net annual return on assets of 3 percent on $100,000, a constant $5,000 annual withdrawal lasts an age 66 couple until age 95. Although a Wall Street inflation model with an initial 3 percent safe rate results in higher income when the couple is in their 80s and 90s, this static withdrawal method provides more income early in retirement when it is more likely to be used to enhance quality of life. The effects of inflation may be more or less offset by elective decreases in spending.

Another area in which behavior trumps computer models is on Social Security maximization. The logic is that if you don’t need the income you should delay beginning your Social Security until age 70 because the income is guaranteed to grow at 8 percent and you can’t find any other sure thing paying 8 percent. Indeed, on a pure cash basis you are money ahead by age 80 if you wait until age 70 to start taking a payout. However, a significant percentage of people take benefits at age 62 even if they don’t need the income.

The reason for the early claiming is simple: loss aversion. The retirees all have done the math and figured out if they die before age 78 or so they get less money if they wait to claim benefits. If they die early they feel they’ve gambled and lost (ignoring the reality that Social Security would have provided benefits to their spouse and minor children if they had died early, or provided an income if they became disabled). To keep the casino (Social Security) from making them suckers they’re determined to at least get back some of their bet.

You can say that from an implied investment return perspective you are silly to claim early if you don’t need to. You can talk about life expectancy and how there’s better than a two in three shot the retiree will live long enough to benefit from waiting to draw benefits. You can show all the models and data you want and it won’t do any good, because what is driving this decision is loss aversion. Instead, offer an alternative that deals with their loss aversion and talk about how they can take control of the gamble.

A person retiring today at age 62 getting $12,000 a year might get $21,750 if they waited until age 70 to start benefits (I’m keeping inflation constant on both sides).

If the person waits they get $9,750 more a year—the crossover point is age 79 (we’re assuming the retiree does not need the $12,000). Let’s say that $12,000 a year is placed in a flexible premium annuity that grows at 3 percent net interest per year and has a guaranteed lifetime income roll-up rate of 6 percent and a joint payout rate at age 70 of 4.5 percent. This would mean the cash account value would be $106,708 and the joint lifetime income would be $5,300 at age 70.

If a person uses the early Social Security money to buy an annuity, beginning at age 70 they would then receive $17,300 ($12,000 plus $5,300)—far short of the $21,750 they would have received by waiting for Social Security. However, the retiree’s early claiming decision means they have complete control of $106,708 today and the remaining balance in future years. The retiree that won’t wait to claim Social Security might be tempted with a solution that makes up for some of the foregone income and lets them keep control of the cash.

The effectiveness of retirement planning advice is not judged by how pretty the computer income model is, but by whether the retiree takes the advice. Not taking into account the behavioral biases that affect retirement decisions means the advice is much less likely to be used.

If you have ever browsed a book on psychology you may have run across something called locus of control. Having an internal locus means one feels he is in control of what happens in his life, and having an external locus means feeling that what happens is due more to chance, the influence of others or fate. Even though it has become a pop psych term, it is real. People do have an external or internal locus of control, and this greatly affects their decisions—including financial ones. Two recent studies on these loci have implications for annuities.

Whether your locus is external or internal has nothing to do with age, net worth or education. It is just the way you are. And one type of locus is not better or worse than the other. An external locus may cause you to wear a seatbelt because no matter how good a driver you are you know bad luck could cause an accident, but an internal locus could cause you not to wear a seatbelt because you know your driving skills will save you from a collision. However, that same external locus might result in you not saving in an IRA because you feel the financial markets are all rigged against the small saver, while an internal locus will make you an aggressive saver because you know you are in charge of your financial destiny.

People who believe they are in control (internal locus) do tend to save much more than people with an external locus, and they tend to have a much higher net worth, even after adjusting for the increased savings rate. Here’s why: Since people with an internal locus feel they are in control, they are much more likely to invest in riskier assets—because they feel they can control the risk—and these riskier assets provide the potential for higher returns over time. By contrast, those with an external locus tend toward more conservative instruments.

What this means in the fixed annuity world is that an individual with an external locus is a stronger annuity prospect because he is less likely to feel he can do a better job of managing risk and returns than he can get from an annuity. Consider the retirement concern of running out of money before death. An internal locus of control gives a person confidence that by self-managing the assets, any calamities can be outwitted (thus negating the need for a life income annuity). An external locus gives a person a feeling of being at the mercy of the financial tides. Therefore, the guarantee of a fixed annuity income is a lifeboat that offers protection from the storms of fate.

How do you determine whether the prospective annuity buyer has an external or internal locus? There are written tests designed to identify one’s locus, but having the client take a personality test before the appointment might meet with some resistance. Instead, you may want to mix in some locus of control-related questions during the appointment, such as “Do you feel you are in control over where you will wind up, financially, in your retirement?” and “When it comes to your financial future, do you sometimes feel like you are getting pushed around by outside events?” What you’re trying to hear are statements indicating that the person believes he is in control or that the person believes luck and happenstance play a major role. If the person indicates that he feels overwhelmed or overpowered, or that life is a roll of the dice, the use of an annuity may help restore his balance and sense of control. 

Resources:

Locus of Control and Savings: www.rwi-essen.de/media/content/pages/publikationen/ruhr-­economicpapers/REP_13_455.pdf­

Locus of Control and Investment in Risky Assets: pub.maastrichtuniversity.nl/dfd67f13-ca9e-42c0-8171-211488cbc938

How would you explain what a dog is to someone who has never seen a dog? You could say it has fur, sharp teeth, four legs, and a tail, but so does a cat, and hundreds of other mammals. You could say a dog has a sharp sense of smell, but moths have better olfactory powers. A dog barks-but so does a seal. A dog growls-but so does a Komodo dragon.

It can get even more confusing if we’re questioned. Is a dog large or tiny, tall or short, has a thick or thin coat of fur? The answer is yes. Is a dog smart or dumb, nice or mean, hard or soft? Again, the answer is yes. Is the dog long-lasting or only for a few years? The answer is yes, some kinds of dogs live longer than others and you may want to look at an orthopedic dog bed sale to protect their joints in their senior years.

It can be difficult to get another person to understand what a dog is-much less make them want to buy a dog by only talking about the features of a dog. Instead, you need to explain the benefits of buying the dog. Selling benefits, not features, is included in Selling 101, but that’s only part of the message. The other part is that you need to speak in sound bites to increase the odds of selling the dog. Once you know someone wants a dog, there are a million more factors to consider, such as which breed to get and what to feed them. Fortunately, there are websites like Waggel.co.uk that could answer any of your dog-related queries.

If you were a dog seller and a dogless person came in complaining about neighborhood burglaries, you would tell the prospect that a dog protects property by barking, which alerts its owner to danger and scares away the thief. If the person said he was lonely and had no friends or family nearby, you would say a dog is a companion that will even keep its owner’s feet warm on cold nights. A biologist would surely describe the dog in terms of fur coats and keen eyesight, and a philosopher might bloviate about the pack instinct in humankind. But neither is trying to sell dogs.

An insurance agent sells solutions to many problems. Many consumers need a solution to one problem. If you show that you have the solution to that one problem, you may well get the sale. If the agent starts talking about the many solutions dogs provide, the consumer will not buy the dog.

The standard response of a salesman to “what do you do?” is “what do you need?” Since that might sound a bit flippant, the real response would be something very broad, as in “I help people lower their financial risk” or “I save retirements” or “I keep families together.” If the response is “what do you mean?” or “how do you do that?” the answer isn’t “with annuities, did you know the ancient Egyptians first used annuities…” The response is to highlight a feature as a benefit of the product. “I save retirement by guaranteeing you can take 6 percent from your IRA and never run out of income.” Or, to describe life insurance, you might say “I help keep families together by promising that if the breadwinner dies, for every dollar placed with me the family will get one thousand dollars back.”

An agent needs to create 10- to 30-second sound bites on the important benefits provided by features of the products they offer. This does a couple of things. First, it focuses on the key features most likely to become benefits of interest to the consumer. Second, speaking in sound bites forces the agent to pause, and this gives the consumer the opportunity to say whether the benefit is of interest. Too many sales are lost because the agent kept talking about a solution the buyer didn’t want and the agent didn’t cover what the buyer did want.

Selling benefits is old school, and it still works because people buy benefits, not features. The only modification I’m suggesting is to cut your benefit comments down into short sound bites, because that gives the prospect more opportunities to talk, which increases the odds you’ll find a problem that needs solving. If the consumer is looking for a gift for their kid’s 10th birthday, commenting that “this dog loves to play and will make your child happy” is probably all you need to say.

We know that people often dont maximize the expected utility of a financial decision, but rather make less than perfect decisions due to cognitive biases in decision making (often referred to as the effects of behavioral economics).

In the insurance world, a prime example of this is the person who pays a $100 higher car insurance premium to get a $500 deductible instead of a $1,000 deductible but then doesn’t turn in a $900 claim because he’s afraid his rates will go up. However, in an ideal world he should not have to worry about this, as his insurance should cover everything that it needs to cover. He also doesn’t need to spend a fortune on his car insurance, as he should be able to easily get affordable auto insurance. But maybe people think differently when it comes to the insurance world.

Another example is someone with two children and a smart phone who will spend $9 a month to cover the loss of their $400 phone, but not to provide $100,000 to help cover her income loss if she dies.

The biased reason for the first is bad mental accountingwe feel paying $100 a year is cheaper than incurring a $1,000 loss (even though the actual additional loss would be $500 and if we make it six years without a claim were money ahead). The reason for the second is vividness biaswe can see losing the cell phone, but we really dont believe well die in the next year.

Another behavior that affects decisions is treating insurance as an investment instead of a risk management tool (this ignores cases in which insurance is used as an investment). Prime examples of this are people who pay long term care or flood insurance premiums for years and then drop the insurance because they didnt get a return on their investment (enter a nursing home or be flooded). The decision to drop coverage is also influenced by projection bias, meaning that since the bad thing didnt happen in the past, we assume the odds are lower that it will happen in the future.

The fact that cognitive biases often affect insurance consumers is known; less realized is that these same biases affect other players. A book published last year written by Kunreuther, Pauly and McMorrow titled Insurance & Behavioral Economics shows that both insurers and regulators also make less than perfect decisions due to biases. As an example, in 2000 OHare Airport was insured for $750 million if the loss was due to terrorism and the premium was $125,000 a year. After 9/11 the best quote was $150 million coverage for a $6.9 million premium. Did the odds of a terrorist attack suddenly increase from 1 in 6,000 to 1 in 22? No, but the vividness of the 9/11 attack made it seem so. Even though the probability did not change, vividness bias caused pricing behavior to change.

On the regulatory/political side, hurricane coverage has driven less than ideal decisions. A prime example is in the years prior to Katrina there were thousands of Gulf Coast homeowners who refused to buy flood insurance. After Katrina we saw state officials suing insurance companies for not paying for the flood damage that the homeowners insurance policies very clearly showed was not covered, instead of passing legislation requiring people in flood plains to maintain flood insurance.

All players in the insurance game are subject to behavioral biaseswhat can be done?

One possibility is to look at all insurance as it relates to the societal cost for not having it. We require car owners to carry liability insurance (or the posting of a bond) to pay for damage the owner might cause to another, so that the person not responsible for the accident does not have to pay. Are you thinking about changing your car insurance policy? Perhaps you have just purchased a new vehicle or simply need a more affordable policy? Head to the My Car Insurance Quote website to compare a few different policies to work out your next steps.

Although car insurance is a legal requirement, depending on the vehicle you intend on driving as well as your personal circumstances, it can be expensive. However, it is often useful to know that completing additional driving courses can reduce the price of your car insurance. You can learn more about driving school courses by searching online for an online traffic school california. Why not take a look and see if you could end up making a saving on your car insurance.

Along the same lines, since hurricanes will always be with us, do you think it makes sense to require coastal homeowners to carry comprehensive hurricane and flood insurance, charge them the full actuarially fair premium, and not support them through tax dollars or subsidies from non-coastal homeowners? Do bear in mind that when a home does suffer flood or storm damage, insurance companies don’t always pay a fair amount. Many insured homeowners often find themselves needing a public adjuster Doylestown assessor to ensure that the amount they receive is fair.

On the life side, a person with dependents could be required to show assets that produce a replacement income if the person died; this would most effectively be accomplished through private insurance policies. For those of limited income, a tax credit or insurance voucher could be available. If you consider the overall cost of tax dollars paying child support costs for 1 to 18 years versus a tax credit of $200 for insurance, the tax credits are cheaper.

The message is that we need to look at the insurance marketplace in a different way. Not as one driven by liquid capital markets, premiums that are always actuarially fair and consumers who make completely rational decisions, but as an area in which many decisions are impacted by biases.

Understanding what the biases are and how they affect the purchase, regulation and management of insurance products may result in a fairer system that provides better coverage for more people at a lower cost!

You are age 65 and it’s your first day of retirement. You are about to tap a putt into the ninth hole. Based on your experience, you believe you will sink the putt.

Just to make it interesting, let’s make a little bet. If you sink the putt, you are guaranteed that you can take out an ever-increasing amount of money from your retirement assets and you’ll never run out of money in retirement-even if you live past age 100. However, if you miss the putt and the ball winds up on a completely different fairway, your money runs out before you’re age 80. Do you take the bet?

Wall Street makes a lot of investment projections calculating sustainable rates of withdrawal in retirement. Depending on the mix of stocks and bonds-and the initial withdrawal rate used-these predict that the invested money will last at least 30 years 90, 94 or 98 percent of the time. In golf terms what the projections are saying is you can move your ball closer or farther from the pin to wherever you think you’re pretty sure you could sink it, and the farther you go back from the hole, the larger the withdrawals promised. Essentially you are controlling the risk and the game because it is your decision on how much to withdraw and how to invest guided by the Wall Street model.

Let’s go back to the golf course and consider this: Unbeknownst to you, a hawk has mistaken the ball for prey and will swoop it up before it hits the hole, or a miss-hit ball from the adjacent fairway is arcing toward your green, smashes into your ball and sends it ricocheting onto the next fairway. In both cases you have lost your bet, and instead of enjoying a long and prospering retirement you will experience one with financial hardships.

We have all heard of black swans-disruptive events that cannot be predicted-but the situations mentioned above are not black swans because they could be predicted. The hawk and the ricochet are outliers in that they were possible, but extremely unlikely. Unfortunately, almost all retirement income models simply ignore outliers-therefore, retirees should not.

The 4 percent inflation-adjusted portfolio withdrawal rate assumed a 50/50 mix of stocks and bonds and provided a 94 percent confidence level that it would last at least 30 years; however, it also assumes that the long term returns of stocks and bonds continues into the future. Instead, if we assume that this current low-bond yield environment hangs on for a decade before rates return to their historic “norm,” our confidence in the retirement money lasting 30 years drops to 68 percent, and if bond yields never recover, our confidence in producing that 4 percent payout rate drops to 43 percent.¹

The previous example looked at an outlier of very low bond rates. Sequence of returns risk means starting withdrawals during a period of losses. This risk is not an extreme outlier, because the bear markets of the 1970s showed what could happen. Yet it wasn’t until after we had two severe bear markets within eight years of each other that Wall Street considered reducing the suggested levels of sustainable withdrawals below 4 percent.

Another outlier is if a medical breakthrough in longevity results, where living to age 100 or 105 becomes commonplace; to get retirement income confidence levels over 90 percent would require investment portfolio withdrawals to drop below 2 percent.

If any of these three outliers occur, the options are to save much, much more for retirement (impossible for one already at retirement age); to withdraw much, much less; or to die early.

Another way is to transfer the risk of these outliers to a third party-an annuity carrier.

A guaranteed lifetime income-whether it comes from an income annuity, a deferred income annuity or a lifetime withdrawal benefit-provides protection from retiring at the wrong time, living too long or earning too little. It assures that whether you sink your putt or not, you can go on with your game. And there are various ways in which you could utilize that, to increase income! In the case where someone would want to play online betting games, without the will to invest, they could always go for the ones which give 10 no deposit spins. If at all you win something from there, would be an added bonus to your retirement income.

However, a guaranteed annuity income won’t help if the world gets destroyed by an asteroid, nor will it stop someone who chooses playing slot machines as their new retirement activity. Or if it’s not slot machines, they may decide to try their hand at online casino applications, like Pussy888, to earn that extra bit of income during their retirement years instead, especially if they’ve heard that other people have won big at their games. Every little helps after all. It’s why games like those on the kiss918 apk are so popular. However, when it comes to retirement income, fixed annuities lower the risk from many outliers and eliminate others. Perhaps the biggest risk with fixed annuities is that retirees won’t learn about them until it is too late.

Footnote:

?1.?”The 4 Percent Rule is Not Safe in a Low-Yield World,” Finke, Wade and Blanchett, January 2013, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2201323.

You increase the likelihood of selling to someone in their fifties or older if the sale focuses on the emotional benefits of the sale.

You increase the likelihood of selling to someone younger than age 50 if you can show how the product will increase their social interaction or if the sales presentation is made in a setting of social interaction.

People tend to organize their goals based on their perception of the future. If one’s perception of the future is nonexistent—they live in the moment—there may not be any goals and the result is more reckless behavior (if we knew a comet was going to destroy the earth next week, I’m betting the consumption of chocolate and desserts would soar and fewer salads would be eaten). However, the future timeline usually gets sliced a little finer than that.

People who perceive their future time as more limited tend to concentrate on fulfilling emotional goals—they want to feel happy and secure or, at least, not sad and vulnerable.

People who perceive their future time as essentially unlimited tend to concentrate on social relationships—they want to enjoy being part of a group with others who share their interests.

What This May Mean for Annuity Sales

If an agent is talking with a boomer, focusing on the emotional benefits may be better than focusing on the financial ones: Buying the annuity means you won’t spend your future worrying about losing your money in the stock market…or, buying the joint lifetime benefit rider means your widow will always get a check. For this age group the emotional benefits of an annuity—less worry and protecting loved ones—may be more important than the financial ones. Agents have known for years that buying life insurance or annuities often has a strong emotional element; all the new research does is confirm this.

For those in their thirties and forties the goal selling aspect isn’t as tidy because a higher priority is placed on forming or enhancing social relationships. What these ages are looking for is a way to connect with similar people. The implication here is that agents and carriers should try to make annuity buying more of a social event. Here are a couple ideas on how to do that.

Both carriers and agents may wish to establish chat rooms on their websites—open to only current customers and pre-screened prospects who can discuss their financial issues and concerns. The carrier or agent would act as a moderator to answer questions. The hope would be that consumers would create social connections with the annuity being the catalyst, thus increasing the likelihood of an annuity purchase by prospects because owning an annuity helps them become a part of the group.

An idea with a more direct and personal touch is to increase the use of customer appreciation dinners/picnics/events and encourage customers to bring their friends and their own adult children. The friends will see that similar people own annuities. With the adult children in mind, an agent could have a special session for “annuity beneficiaries” which would provide an opportunity for socialization with other beneficiaries (and plant the seed that they should be considering annuities for their own retirement).

The goal orientation of older people tends to align with annuities. Older people focus on the emotional benefits of a decision, and an annuity provides true emotional benefits. Younger people tend to make less impulsive and more far-seeing decisions if they are making greater social connections.

The problem is how do you turn annuities into a social experience? Although a couple examples were given, there are no clearcut answers. However, if we keep experimenting, maybe someday we will make it more likely that a 30-year-old puts that extra $100 into a flexible premium annuity rather than spending it at the club. 

Depending upon our age, we have parents or grandparents who were kids of the Great Depression. They tend to do things such as keep more than a week’s groceries in the pantry; save string, pennies and broken clocks; and continue to use the 1998 Nokia cellphone because it still works. The one thing they didn’t do was invest in the stock market.

Unlike today when people of any background have the ability to invest in anything from the Zukunftstechnologie Wasserstoff market, to cryptocurrency and different stocks and shares, back then the stock market was the almost exclusive domain of professionals and the wealthy until the 1980s when the post-depression generation came into the main-the baby boomers. The boomers and subsequent Generation Xers were a part of the greatest bull market in history, and the financial behavior of these generations was markedly different from those previous.

Boomers and Xers are investors, not savers, live for today instead of planning for tomorrow, and borrow to buy rather than wait for cash in hand. I’m painting with a broad brush, but the generalization has validity.

Then came the three-year millennium bear market that was the longest down period since the troubles of the 1970s; it cast doubt about the wisdom of Wall Street. Five years later the crash of 2008 brought the most savage financial environment since the Great Depression. It wasn’t just that the stock market lost more than half of its value, it was a coda to a 20-year period that had seen massive disruptions in job security and the more recent phenomenon where even a family’s home could become a liability instead of an asset. Back in October 2008 I wrote that this would cause a generational change in financial attitudes-and it has.

Numerous studies have concluded that consumers are more financially risk averse than they were. Many more consumers wish to avoid the possibility of market loss entirely and many have also made the conscious decision to accept lower returns in exchange for more safety. Nowhere is this truer than in the generation I didn’t mention-the Millennials.

Millennials (or Generation Y) are those around 30 or younger. They test as risk averse as retirees in their seventies because all they’ve seen is financial and economic uncertainty, which has made them better savers and harder workers than the previous generations were in their twenties.

This change in attitudes has affected behavior by making more people look for less risk and more guarantees. Wall Street realizes this, which is why we are seeing structured investment products being developed that put limits on upside return, thus allowing some protection on loss, or that partner with annuity carriers to create contingent deferred annuities that offer real annuity guarantees. Washington realizes this and is slowly beginning to embrace and even require the availability of annuities in retirement plans. When it comes to online trading, people are using things like automated crypto trading platforms which assure that they will only put a person’s money where they genuinely believe it will get a good return.

Fixed annuities are the big winner here for several reasons. First, in this rising interest rate cycle, multi-year guaranteed annuities will be able to offer significantly higher yields than certificates of deposit. This is due to the increased capital constraints imposed by bank regulators, which will keep bank yields down and, thus, annuities will be the better yielding safe money place.

Second, higher interest caps and new crediting methods in the indexed annuity world allow savers and former investors the potential for competitive returns without fear of the next bear market.

Third, the use of guaranteed lifetime withdrawal benefits will continue to grow because they not only provide the lifetime benefits of life contingent immediate annuities, but they do so without triggering the behavioral biases that stop so many immediate annuity sales. This will be a golden age for fixed annuities.

In the future, Generation Y will be a major buyer of fixed annuities-all they are lacking are assets. However, they do have disposable income and the right attitude for cash value life insurance. Gen Y wants certainty, predictability and guarantees. Gen Y also places a high value on protecting family.

All of this means they are receptive to the life insurance story. Yet, why aren’t they buying more life insurance? The main reason appears to be that they’ve never had a life insurance agent contact them.

The crash of 2008 caused the greatest change in consumer attitude toward financial risk since the Great Depression. The resultant behavior changed from risk-seeking to risk-averse and to value guarantees over projected returns. The net result is that there are more annuity and insurance prospects than ever before.