Sure, annuities can be a complex subject, but new research suggests that the relatively low adoption rate for annuity purchases might be explained by a pretty simple concern: death.
The paper, by researchers at Boston College, concludes that at least part of the solution to the annuity “puzzle” – the low rate at which retirees buy annuities despite the preponderance of rational arguments for purchasing them – might lie in what they call mortality salience, better understood as the increased accessibility of death-related thoughts. Said another way, the annuity purchase requires individuals to think about dying – something they do not like to think about – and so, rather than think about death, they choose not to think about – or act on – the annuity purchase that requires that they consider their own mortality.
To confirm their theory, the researchers conducted four different studies to evaluate the impact of death-related thinking on the annuity purchase decision. In one study, two groups were presented with a hypothetical scenario in which they were 65 years old and beginning retirement. One group was asked if they were interested in putting their savings into an Individual Retirement Account (IRA), while the second group was asked if they were interested in an annuity. After giving their responses, the participants in both groups talked about the thoughts they were having. The researchers found that 40% in the annuity group had death-related thoughts, compared to only 1% in the IRA group.
As a second test, the researchers asked participants in the high mortality salience (MS) condition to write about their own death, while other participants were asked to write about dental pain. Then, having completed those essays, participants were given a hypothetical scenario where they considered whether or not to put their retirement savings into an annuity. The researchers predicted that those who wrote about death would be less likely to choose the annuity than participants who wrote about dental pain – and sure enough, they were. Asked if they wanted to put savings into an annuity, the group that had written about their own death was 50% less likely to choose an annuity.
Those inclinations were further supported in another, more ‘real world’ scenario outlined by the researchers incorporating references to death (or not) in sample annuity marketing materials.
The researchers said that their studies yielded an average 11.53% point decline in annuity choice rate when MS increased.
They also suggested that this research suggests that this “mortal salience” could play a role in other late-in-life financial decisions, such as creating a will, buying life insurance, and estate planning – activities often avoided by individuals.
