COVID-19 is “a sudden shock to mortality,” and the uncertainty it’s caused makes annuities “more valuable than ever,” argues retirement expert Moshe A. Milevsky.
Still, many investors don’t see annuities this way. Fewer financial advisors are selling annuities because, for one, virtual meetings make sales difficult to close, says Milevsky, a tenured professor at York University’s Schulich School of Business in Toronto.
Milevsky argues that due to high uncertainty and fear of death from COVID-19, prospects see scant reason to buy annuities.
Plus, some companies that sell variable annuities are exiting that business because of near-zero interest rates. Other firms are considering if they should stay in the annuity arena or not.
Yet, Milevsky sees greater value in annuities today more than ever: As the coronavirus reduces life expectancy, the products’ utility value has increased, since longevity risk has gone up.
A person’s chronological age and their biological age aren’t identical. In other words, biologically you can be either younger or older than you are chronologically, as Milevsky explained in his 2019 book, “Longevity Insurance for a Biological Age: Why Your Retirement Plan Shouldn’t Be Based on the Number of Times You Circled the Sun.”
Related: The New Road to Retirement Income
In terms of the coronavirus, if one’s biological age is higher than their chronological age — most likely because of an underlying medical condition — the virus’s impact will be worse. This fact of life is clearly a big negative for annuity sales.
Milevsky, a popular industry speaker and consultant, recently published the book “Retirement Income Recipes in R: From Ruin Probabilities to Intelligent Drawdowns (Use R!)” — a how-to on creating simple scripts for retirement income planning in the “R” coding language.
His current consulting work includes working part-time as chief retirement architect for Canadian money manager Guardian Capital Group and writing white papers for insurance companies, like Jackson National and Athene.
New Approach Needed
When Milevsky spoke with ThinkAdvisor recently, he said financial advisors’ annuity pitch today must address “the fears of the individual client” rather than using a one-size-fits-all approach.
He also offered his forecast on significant changes in the annuity product mix as a result of the pandemic, and a reason for the popularity of the relatively new Registered Index-linked Annuity (RILA).
While sales of individual annuities were down 7% in the third quarter of this year vs. the year-ago period, RILA sales rose 29%, according to the Secure Retirement Institute.
“COVID is turning us into winners and losers in many dimensions: She has a safe job; he doesn’t. He’s in great physical health; she isn’t,” Milvesky said.
“You have to tailor your message to the audience. That’s just as important now as it ever was,” he added.
Here are excerpts from ThinkAdvisor’s recent interview with the retirement income expert:
THINKADVISOR: Is now a good time for people to reassess their retirement plan?
MOSHE MILEVSKY: Yes, because everyone is obsessed with longevity and mortality. Everyone knows someone that got COVID and survived and another person who got it and didn’t survive.
In the few years after the  Spanish Flu [pandemic], the life insurance industry had phenomenal sales and went through an unprecedented boom. Now, once again, [mortality] is suddenly in [people’s] consciousness.
But amid all the uncertainty, why have overall sales of annuities, an insurance product, decreased?
COVID has made annuity sales more difficult to close. Every insurance company in the U.S. has laid off wholesalers — whether it’s Jackson National or Pacific Life [etc.]
There are now fewer wholesalers, because there are fewer advisors selling annuities.
What’s your take on that trend?
When an advisor tells me they’re having a tough time positioning annuities because of all the uncertainty, my response is, “Quite the contrary.
Because of COVID, annuities are more valuable now than ever because of the uncertainty. Utility value has increased, which is how much people [connect] with the benefits of the insurance.
But why does the uncertainty make annuities more valuable?
Annuities are insurance against longevity, and that is an uncertainty that’s greater now.
Look what’s happening! We really don’t know if we’re going to live a long time. Longevity risk [has increased]. That makes annuities more valuable.
What else is impeding advisors’ annuity sales?
My understanding is that, anecdotally, it’s more difficult to communicate about annuities virtually. For instance, it’s much easier to cancel a Zoom meeting than one at a broker’s office.
Advisors tell me they need three times more calls in order to close business, because of the ease with which people can cancel or defer meetings.
What else is negatively impacting annuity sales?
The emotional message is hard to [get across] virtually.
If you’re on Zoom and kids are running around in the background, it’s difficult to give that emotional pitch you need in talking about insurance – when you hold the person’s hand and say, “How will you [cope] if something happens?” And then you pause for effect. You can’t do that virtually.
Are advisors bringing up annuities in connection with the coronavirus?
Advisors don’t want to talk about COVID. It isn’t something you use as a conversation [starter]! In fact, [prospects] are using coronavirus as a push-back against annuities.
Clients say: “You want me to talk about living a long time! People are dying from the pandemic! All I read about is death and disease. The markets haven’t gone down much despite COVID. So why would I buy an annuity?”
What about annuity prices? Are they a factor in the sales decline?
Prices and payouts on annuity products are out of date and stale. Pricing was set months ago, when the yield curve and interest rates were at different levels than they are now.
But advisors are opportunistic: I think there’s going to be a movement like a fire sale, where advisors will [figure], “That price can’t last. Let me call some clients and tell them about it!”
Your book, “Longevity Insurance for a Biological Age” is applicable with regard to COVID-19, isn’t it?
Yes. Biological age is much more relevant than it’s ever been. COVID has brought to life the discussion of biological age more than ever before.
But COVID is bad for your biological age, and that’s not helping annuity sales.
Biological age seems to be a key determinant in surviving COVID-19, correct?
Yes. Some 60-year-olds get COVID and die immediately, and other 60-year old’s get COVID, recover, and a week later they’re fine.
[Often people don’t survive] when there’s comorbidity — like having a heart condition or being [very] overweight. [In the above example], one 60-year-old could be biologically 70 and the other, biologically 50.
The research shows that the higher your biological age, the [worse] COVID affects you.
If an advisor wants to broach the subject of annuities to a client, what should they say?
They have to tailor their annuity pitch to the fears of the individual. You can’t come [on] with your standard slide deck anymore.
You’re going to have a different conversation with someone who has a secure white-collar job versus someone who’s worried they may [soon] be unemployed.
Will annuity seminars for advisors and clients be held once the virus is under control?
You can’t take 15 people out to a steakhouse, wine and dine them, and then pitch annuities anymore.
That [tack] of packing people together in a room, giving them some free cookies and telling them why they need an annuity isn’t coming back because we’ve become accustomed to new interactions.
Broadly, what do you see ahead for the annuity industry?
There’s a whole bunch of products that are never coming back. For instance, anything that involves a too-lucrative guarantee, where too much is being given away. So some products will leave, but others will take over.
What’s one that you see likely to stay?
The RILA: [Registered Index-Linked Annuity, on which a loss limit can be set], for example. They’re [relatively new] but are popular. Their growth has exceeded that of indexed annuities or variable annuities and certainly that of QLACs [Qualified Longevity Annuity contracts].
Why are RILAs so popular?
Advisors are doing better business with them because with interest rates so low, people need to find things that are easier to hedge.
What impact are very low interest rates having on firms that sell annuities?
Rates at near-zero is one reason that some companies are pulling out of the variable annuity business. Others will dial back. Some will wonder whether they should be in the annuity business at all.
When do you think annuity sales will pick up?
It depends on when we get a COVID vaccine [distributed].
What do you see as the pandemic’s long-term impact on the financial services industry?
As a result of COVID, there’s going to be an irreversible change in how people think about financial products. And it will be a long time before there are big in-person industry conferences again.
The reason is legal liability. Nobody wants to take a chance that people will get sick [with COVID-19] because the insurance companies aren’t going to cover it. So [firms and organizations] will say, “I don’t need this headache. Let’s just do it virtually.”