The public hears good things about annuities, such as annuities can keep you from running out of money, said Meir Statman at a retirement income conference here.
In fact, a working paper written in 2003 by C.W.A. Panis for the Pension Research Council shows that people who do not have annuities are unhappy, less satisfied and depressed, said the Glenn Klimek Professor of Finance at Santa Clara University, Santa Clara, Calif.
If that is so, why don't more people own annuities? he asked.
Standard reasons include desire to leave money to heirs, loss of liquidity, high fees and mortality expectations, he said.
But there are also behavioral reasons, Statman noted, addressing the annual managing retirement income conference, co-sponsored by the 2-year old Retirement Income Industry Association, Washington, D.C., and the Institute for International Research, New York.
One example is the feeling some people have that annuities have "the smell of death" about them, said Statman. During the sales process, he explained, there is often too much focus on fear and not enough on hope.
Advisors should frame the discussion so that the sale is "about the upside potential, not just the downside protection," he said.
Many people have a mixture of risk-seeking and risk aversion behaviors, he explained. "We want to be secure but we also want the upside. That's why people (who own insurance) also buy lottery tickets."
People who buy lottery tickets have hope, he said.
Where annuity sales are concerned, "be careful not to extinguish hope." Instead, combine discussion about downside protection with discussion of upside potential–and "don't annuitize everything," Statman said.
He presented several other reasons from the behavioral economics point of view, plus some suggestions for dealing with them. Here are examples:
o Frame how buyers think about their "money illusion." For instance, talk about moving the money less from the perspective of keeping a stock of money and more from the perspective of setting up a flow of money. That concept is not always easy for consumers to grasp, he allowed, explaining that they tend to think of their money being reduced when they purchase an annuity. But advisors understand it–and they should explain it to clients.
