It is The Time for an Annuity Lesson

America has a financial and annuity literacy problem.

Many surveys have indicated that Americans score very low on questions about basic financial concepts. Moreover, the annual LIMRA Insurance Barometer Study constantly reports low levels of understanding when it comes to the basics of annuity products.

As the knowledge levels were not low enough, the financial media sends confusing messages regarding annuity products. Are individuals supposed to hate annuities as the long-running promotional campaigns dictate? Are they supposed to love them?

It’s time for a new idea in this continuing conflict of words and promotional messages. That simple idea is to educate consumers about annuities to understand how these products work and what their benefits and constraints are. Currently, annuity products deal directly with several key financial and life risks to which our aging population is exposed. Therefore, we have to level the playing field of annuities.

After consumers improve their understanding, they can make informed decisions on whether and how annuity products serve their financial situation. It’s on us, as an industry, to give a better picture of how these products work and their practical benefits. We have not done a good job in spreading the word. It seems we have been unenthusiastic to tell the annuity story in the right way.

Let’s explain why it’s the right time to focus on annuity literacy to support one of the industry’s core product offers.

There are a lot of annuity critics in the financial media. They usually have negative things to say about almost all types of annuity products. They often respond to the suggested purchase of annuity products strictly from an investment perspective. They offer other options they say are cheaper and higher-yielding alternatives to annuity products. They also present these alternatives as more flexible. However, they do not provide information about the benefits of annuity insurance products. These are the guarantee of lifetime income, minimum returns, contractual guarantees, and others.

The alternatives are also portrayed as superior because you don’t pay an up-front commission to the financial professionals with them. Instead, they have lifelong annual fees. In my opinion, from an economic point of view, in most cases, consumers will give more money for fees throughout the investment period than for upfront commissions when purchasing an annuity. That is because the money they place into annuities will keep on being invested for the medium- to long-term before they access it. That is the point the mass media is missing, but it’s significant for most consumers.

The intrinsic value of annuities stays strong and includes guaranteed minimum returns for fixed products, a guarantee of a lifetime income, tax deferral and state-based solvency regulation, and principal protection options. There are new and original extra added benefits (e.g., income, fatal illness, long-standing care benefits, and retirement facility confinement riders) and the prospective for a fixed (indexed or declared rate) variable, or buffered-based earnings, varying on the purchased annuity product.

Critics also talk about how complex the products offered are. That is a valid point as at this time, the process can be pretty overwhelming for all the parties involved in the sale. This is due to the current sales process of disclosures, the numerous newly proposed indexing methodologies, illustrations, and regulatory forms. Still, a lot can be done to make this process simpler and more straightforward.

Keep in mind that annuity products are not bad for your health, and they won’t make you fat. Instead, they can deliver you financial security and an easy mind if properly sold and managed.

Nowadays, there are various main economic and demographic reasons in play that encourage improving the education concerning the value of annuity products. These reasons explain why annuities need to be in the center of consumers’ attention as they invest and save for their prolonging financial future. These include:

• Increased longevity risk, because life expectancies are getting longer as medicine and technology joined forces to increase them.
• Financial risks that consumers can expect to have as they grow old. In particular, changing interest rates, volatility of the equity market, and sequence risk.
• Guarantees from parties with good financial standing are needed to help alleviate financial risks.
• Potential alterations to Social Security, Medicare, and Medicaid government programs that might cause more significant expenses or decreased incomes at old age.
• The fact that it’s been reported that many people are not ready for retirement as their savings are at considerably low amounts per family and they need to increase their retirement savings.
• To help families with their retirement savings by creating steady income flows they will receive until their deaths. 
• Provide help to newly retired individuals to change their financial efforts from accumulating savings to efficiently distributing them to fund living expenses.
• The tax advantages and disadvantages of annuity products. The tax benefits of these products, tax deferral amongst others, have to be emphasized as future rates will likely rise. Meanwhile, we should also educate consumers on the tax restrictions of the products.