InsuranceNewsNet Magazine June 2010 : Page 28
needthebenefits thatonly income annui- ties are uniquely suited to provide. The context and language in which Redefining Income Annuities For a Consumption World With lackluster sales, it’s time to rethink the way IAs are presented BY JOHN RAFFERTY rize everything from the natural world of plants, animals andminerals ondown to man-made inventions ranging from automobiles to financial products. Becausewe are so serious about defin- W ing “what” something is, there actually was a U.S. Supreme Court case from 1893 that considered whether a tomato is a fruit or a vegetable. Botanically speak- ing, the tomato is a fruit, because it is the ovary and seeds of a flowering plant. But legally speaking, there was more at stake. U.S. tariff laws at the time imposed a duty on vegetables but not on fruits. The Supreme Court settled the matter by declaring that the tomato is a vegeta- ble, based on the popular definition that classifies vegetables by use, and that they 28 InsuranceNewsNet Magazine June 2010 e are a nation and a world of standards and classifica- tions. It helps us to catego- are generally served with dinner and not dessert (Nix v. Hedden (149 U.S. 304)). It’s amazing that we can get the Supreme Court of the United States to rule on the classification of a little red vegetable (fruit?), but we still can’t figure out what to call an income annuity. Is it an invest- ment or something not yet defined? Unfortunately, because we haven’t spent enough time defining what finan- cial genus or phylum an income annu- ity inhabits, themarket has defined it for us in terms of the way it is traditionally presentedandevaluatedby financialpro- fessionals and their clients. And the way it has traditionally been evaluated and presented—by using the investment lex- icon—has probably not helped. Sales vol- umes have been perennially disappointing relative to other products, despite the fact that millions of Americans desperately income annuities are traditionally pre- sented may be the root cause of poor income annuity acceptance, according to a recent study conducted byThe Retire- ment SecurityProject, a coalition of pol- icy researchers andacademics fromHar- vard, the University of Illinois, and The Brookings Institution. The objective of the Retirement Security Project (RSP) is to apply behavioral thinking to economic contexts, and fromthis glean academic, product and policy insights. The hypothesis that the RSP wanted to test was fairly simple. They were inclined to believe that income annuities appealed to consumers who were conditioned to think with a consumption mind-set, and didnot appeal to thosewhowere primed to think with an investment mind-set. In December 2007, the RSP tested the hypothesis and conducted an Internet survey of 1,342 individuals over the age of 50, with respondents being offered small incentives to participate. The sur- vey participants were each presented with a series of forced-choice questions, all asking “Who has made the better choice?” in the financial decisions made by a pair of fictitious retirees, each with $100,000 at their disposal. Specifically, those choices involved selecting either a life income annuity or products such as a savings account or a bond. All choices were actuarially equivalent andweredis- closed as such. The survey participants were divided evenly, with half of the participants presented with the questions in a con- sumption frame, and the other half pre- sented the same questions but with an investment frame. The consumption frame told respondents how much each product—life annuity, savings account, bond—would allow itsowner toconsume and for howlong they could consume it. Words associated with consumption such as “payment” and “spend” were heavily used, and the words “account,” “account value” and “rate of return” were avoided. The investment frame did the opposite – it presented the same choices but avoided consumption-focused words
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