Facts vs. feelings: addressing “irrational” concerns about annuities

Factors like high interest rates and market volatility can make annuities an attractive option for many clients. In fact, as of November 2023, total annuity sales were up 21% over 2022’s record for annuity sales.1

The decline of defined benefit pension plans, increasing life expectancies and concerns among many about the future of Social Security may also be contributing to growing interest in annuities that can offer dependable lifetime income and a measure of downside protection against investment losses.

Even so, financial professionals sometimes encounter clients with strong objections to annuities. Often, their concerns are rooted in a lack of understanding that can be addressed by explaining in-depth how annuities work. But when client objections are grounded in bias or strong emotions, more information isn’t always the right place to start.

In this article, we’ll take a closer look at some of the irrational and fear-driven reasons clients may be resistant to conversations about annuities, and what financial professionals can do to promote dialogue and move forward.

Emotion and bias can impair decision-making

Like it or not, financial decisions are made by people, and that means they’re prone to human error and the influence of emotions and bias-driven mistakes in the way we process information. Some cognitive biases that can affect financial decision-making include:

  • Anchoring — relying too heavily on the first piece of information a person encounters on a given topic
  • Loss aversion — a tendency to prefer avoiding losses over a potentially equivalent gain
  • Familiarity — preferring the known over unknown options
  • Overconfidence — overestimating one’s knowledge and ability to manage investments
  • Confirmation — leaning into information that confirms existing beliefs and rejecting information that conflicts
  • Framing — basing a decision on how facts are presented, e.g., in a positive or negative light

Another cognitive bias to keep in mind is present bias, which can lead clients to overvalue immediate rewards and undervalue future benefits. Present bias can lead to resistance when it comes to managing savings and using credit — both important factors in planning a more secure financial future.

Here are a few ways information-processing errors may arise in conversations about annuities with clients.

They’re overly confident they can outperform annuities with personal investments.

Overconfidence bias can cause investors to be less cautious in their investment decisions out of an assumption that their own skills are above average. That can lead to underestimating risks, overlooking opportunities to diversify and ignoring good guidance. Those mistakes can compromise long-term goals.

Historical market data may be helpful to help address a client’s overconfidence by showing how past “unforeseen” events played out. Sharing concrete information that highlights how unpredictable markets can be is one way to underscore the value of a diversified portfolio.

They doubt they’ll live long enough to benefit from an annuity.

Even with a recent bump in mortality rates, Americans’ life expectancies are expected to keep rising over the next few decades. Yet, survival pessimism can prevent some clients from taking a realistic view of their own life expectancies. The Congressional Budget Office projects that, by 2053 the average U.S. 65-year-old may expect to survive another 21.8 years.2 

Longer lives may also mean a higher likelihood of increasing healthcare costs — which, along with inflation, can quickly erode retirement savings and impact a retiree’s quality of life in later years.

They fail to recognize the value of guaranteed income options.

Some clients may tend to view every financial vehicle or opportunity in the context of an investment frame, and fail to see the benefit of guaranteed income over time as a good use of their wealth. 

Like a fear of dying too early to “get their money’s worth,” framing bias can risk misrepresenting an annuity’s value. It may be helpful to clarify that an annuity is a contract with an insurance provider that may help to address the risk of outliving their retirement savings.

They underestimate the value of future monthly payments.

Present bias may influence some clients to value a smaller, immediate payoff over potentially more valuable future outcomes. That can cause a client to misjudge the potential value of, for example, options for guaranteed monthly income over a lifetime compared with the purchase payment for an annuity.

Present bias can even influence a client who does see the value of annuities to “kick the can down the road,” and put off the purchase. This inertia can limit a client’s opportunity to take advantage of the power of deferral. Helping clients visualize their future and get a concrete accounting of likely future living expenses may help increase their sense of immediacy and spur action.

Help clients take a rational approach to retirement planning and diversification

It is possible to help clients become more aware of the ways emotion and bias affect their financial decisions so they can be more intentional about their investment and planning choices. A behavioral finance approach can help clients recognize how intertwined finances and emotions might be for them, to recognize when those emotions arise and, in time, to prevent making impulsive financial decisions that can get in the way of their long-term objectives.

In fact, it may be helpful to get ahead of your introduction to the subject of annuities with conversations based on behavioral finance principles. A conversation to clarify their core values and acknowledge life’s uncertainties can help you frame the potential benefits of an annuity in meaningful terms that resonate. Ultimately, these conversations can help you strengthen client relationships, too.

Our award-winning Behavioral Finance Advice program offers free tools and resources, and our BFA™-certified wholesalers can help, too. Learn more by calling the TruStage Annuities Solutions Desk at 1.877.GROW (4769), option 1.

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