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Who’s afraid of the big bad annuity?

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Annuities are a scary subject in our industry. Producers are scared about compliance and suitability rules. Carriers are scared about the impacts to their capital. Consumers are scared about getting burned because financial celebrities say annuities are evil. Yikes!

Are annuities really that scary? Not in the textbook sense. When I think back to the 10th grade (yes, I am grateful I can think back that far), I remember learning about annuities in math class. They were defined the same way Wikipedia defines them:

  • “In finance theory, an annuity is a terminating ‘stream’ of fixed payments, i.e., a collection of payments to be periodically received over a specified period of time”

Annuities were a subject under the category of “time value of money.” They helped us understand how to turn a lump sum into a stream of payments and vice versa. You could just plug in interest rate assumptions, the number of payments and either the principal or the payment amount into a formula and solve for the rest. When I was in high school, there were calculators made by HP that did the math for you. By the time I was in college, we were actually allowed to use them.

That was 1984, also the year I entered the life insurance industry as an illustrations clerk. I had to use those same principles for the calculation of settlement payments on death benefits, prepayments of life insurance premiums, monthly retirement income amounts and so forth. I also used them to validate the math in the finance deals when I bought my first car and my first house. To me, the annuity was pretty straightforward and nothing to be scared about. In a geeky way, it is sort of cool.

Why all the fear?

In my opinion, it’s the misalignment of intention that’s scary, not the annuity.

Let’s face it. The Annuity with the capital “A” is not the same as the annuity with the lowercase “a.” Generically, the annuity is just a math equation. It can be designed to last any length of time or a lifetime. Today, however, the industry has designed it to try and outwit its assumptions, with the return as the main attraction.

Variable Annuities, GMIB Annuities, Indexed Annuities…These “innovations” are the ones with the capital “A.” They are used to defer taxes and possibly even make up for a boomer’s shortfall in retirement savings. In order for them to work, they have to sustain some pretty fancy assumptions. That means someone in the equation is taking a big risk.

Were those products driven by what consumers would buy or what producers could sell? No wonder annuities are scary. Have we forgotten the purpose?

The purpose of the annuity is to manage large sums, whether owned or owed.

That’s it.

Very few know that. In fact, a 2010 study done by Maddock Douglas indicates that the general population, Gen Y in particular, has no clue what an annuity is. The industry will blame it on complexity, but really the annuity is simple. Good advice comes from helping people see it that way.

Forget market return assumptions. Forget indexes. Imagine how consumers would react to the concept of showing them how an annuity really works. Let them plug in the numbers. Let them decide what is realistic, with your help. Let them have a hand in determining how to fund it and how long to take the income. What would they buy from you if they were able to engage in that way? What would products look like today if they didAnnuities don’t scare people. People scare people. How can you use this to un-scare clients and prospects and create a competitive advantage?

An idea without an insight is just an invention. An idea driven by insight is an innovation.

For more from Maria Ferrante-Schepis, see: