Do rich people buy annuities?
March 26, 2013 by Stan Haithcock
The rich are usually rich for a reason. So do annuities even get their attention when it comes maximizing their investment goals?
A recent industry consumer study showed that almost 7 out of 10 annuity buyers have a household income of less than $100,000 a year. Without getting into an argument of what the definition of “rich” is (I’ll let our politicians do that!), it is obvious to an annuity critic like me that the annuity industry continues to target middle America. There are also some underlying reasons why wealthy investors have, for the most part, decided to stay away from most annuity offerings.
Here are the facts from a recent annuity ownership study of millionaire investors with $1 million to $5 million in investible assets. With a little over $200 billion of annuities sold in 2012, below are the % of annuities owned by this group:
- 22% of all variable annuities;
- 20% of all fixed annuities.
Surprisingly, people that have between $100,000 and $1 million in investible assets are even less likely to own annuities. They own:
- 15% of all variable annuities;
- 17% of all fixed annuities.
The study shows that the more complex and confusing an annuity is, the less likely a wealthy investor will buy. However, the local annuity lunch seminars or annuity internet-video ads use that same complexity to sell the annuity “dream” to the middle class. I always tell people that if you can’t explain the product in detail to a total stranger or child, then you should not buy it. Unfortunately, common sense doesn’t rule with the uninformed investor. The dream of “it sounds too good to be true” is the basis for way too many annuity sales.
Below are the primary reasons, in my opinion, that most wealthy investors aren’t buying the current annuity sales pitch:
- Not willing to lock up their money in long term deferred annuities (which represent over 85% of all annuity sales);
- majority of products aren’t easy to understand or transparent enough;
- built-in and hidden fees are too high.
The rich, like everybody, are interested in solving for longevity risk and transfer-of-risk strategies in general…and simplistic annuities could be a logical solution. From a non-annuity standpoint, the need for liquidity and not missing possible market growth opportunities are the primary reasons that most wealthy investors don’t buy annuities. As I said in my recent article calling for annuity industry changes, the well-deserved negative stigma that annuities have earned could be turned to positive with some logical steps that I laid out.
There are some annuities that the rich currently use. I’ve listed them below and the reasons why these strategies are attractive to them:
Single-premium immediate annuities & longevity annuities
The original design is still the best design. Single-premium immediate annuities solve for income now, and longevity annuities (a.ka. enhanced deferred immediate annuities) solve for income later. These pure transfer- of-risk lifetime-income products are the most efficient way to combat outliving your money. These annuity structures are easy to understand, have ultralow fees and commissions, and can combat inflation with attachable cost-of-living increases built into the policy.
No-load variable annuities
This product solves for the top two concerns that the wealthy have concerning annuities: Opportunity cost and liquidity. Pure no-load annuities have full liquidity from day one, the upside potential of market growth, along with the power of tax deferral. Because they are no-load, you are never going to be informed about these great products by advisers because there are no commissions.
Charitable-gift annuities
This is the perfect hybrid annuity for the wealthy because it provides a lifetime income, a potentially large tax deduction, and a philanthropic aspect of helping a specific charity. This type of annuity allows you to structure the lifetime income to start immediately or at a specific time in the future.
A recent financial poll by Nationwide Financial showed that wealthy investors are increasingly open to learning more about annuities and other tax advantaged products. With politicians continuing the ongoing “evil rich, fair share” arguments, tax-deferred annuities will increase in popularity…but only if the annuity industry provides easy-to-understand and transparent solutions.
The annuity industry is constantly talking about the need to educate the public about the value of owning an annuity. Currently, I agree with them because over 85% of annuities sold are very complex variable annuities and indexed annuities with long surrender periods. Most of these annuities are so hard to understand that agents end up focusing on a few sizzle points in combination with the typical fear-and-greed, string-pulling sales pitch.
Wealthy investors are going to demand value, simplicity, and transparency before they seriously consider annuities as a viable addition to their portfolio. Hopefully carriers will start offering these simple solutions so that everyone can have access to more pro-customer annuities. It is going to happen. The sooner the better.
