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Life Health > Annuities

Annuities let consumers be a little naughty

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Buying a fixed annuity is a virtuous decision. The consumer is saying they do not want to gamble with their principal and so they have placed it where it will be safe and provide a nest egg or lifelong income, helping them to avoid becoming a burden on their children.

Think of an annuity purchase as a supreme exercise in self-control today to protect tomorrow’s self-interest. It is the financial world’s equivalent of the two-mile morning jog, eating the salad instead of the sundae, or watching PBS instead of E!

But virtue isn’t usually fun because it goes against our impulse for immediate gratification, so often we will reward ourselves for being virtuous by treating ourselves to a little vice. Consumers need to be told that not only is buying an annuity a virtuous decision, but that it is so virtuous it will allow them to be a little naughty.

Case study No. 1:

A couple may have $75,000 sitting in a 2 percent certificate of deposit. They would like to take a little cruise but the cost of the cruise would eat up a year’s interest.

If a 4 percent yield fixed annuity could be found, the couple could maintain the level of interest earned by the former bank (virtue) and still sail the sea (vice).

Case Study No. 2:

Another couple may also have $75,000 sitting in a 2 percent CD, but there’s a conflict. The husband wants to ensure at least the current interest is earned but the wife is willing to gamble if there’s a potential for higher returns somewhere else.

If an index annuity were suggested, offering a fixed account yielding at least 3 percent, the couple could place $50,000 on the fixed side (virtue) and put $25,000 in an index-linked option (vice) with higher potential income (virtue).

Virtue and vice

Retirees may be withdrawing 4 percent a year to try to make the money last, but this low payout means they now stay at home instead of eating out once a month. They should be made aware of annuities offering guaranteed joint lifetime payouts of 5 percent or 6 percent, which promise they will never run out of income (virtue) and perhaps let them dine out monthly again (vice).

Determine the additional interest the annuity could produce and then ask the consumer, “If I gave you an extra (fill in the blank) dollars, what would you do with it?” This will identify the vice, and now you can show why the annuity is the virtuous decision.


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