Report Card: Annuity Literacy Less Than Sterling
May 8, 2017 by Warren S. Hersch
New research from The American College reveals low to moderate levels of financial literacy among Americans, particularly in their knowledge of core protection products.
The 2017 RICP Retirement Income Literacy Survey Report, released by The American College’s New York Life Center for Retirement Income, reveals a markedly low financial proficiency in respect to annuities. Fewer than one in three Americans (29%) understand that buying an immediate annuity is more expensive for a younger consumer than an older one.
Still more abysmal is the lack of knowledge about annuities’ key benefits and features. For example, fewer than one in five respondents (14%) know that a deferred annuity carrying a guaranteed lifetime withdrawal benefit (GLWB) option can pay income even if the invested principal falls to zero.
Likewise, just 17% of respondents understand that a 65-year-old male can expect an annual income varying on average between 6% and 7% of the purchase price for an annuity paying a lifetime income. This stands in contrast to the 74% of respondents who agree that having an ironclad source of retirement income for life is “important.”
Turning to life insurance, six in 10 of those polled understand that policies distribute death benefit proceeds income tax-free. But only 38% know that the “inside buildup” or cash value of a permanent life insurance policy grows tax-deferred.
Surprisingly, most Americans wrongly believe the following about cash value policies: (1) that they expire after a set period (92%); (2) that policyholders cannot borrow from the cash value (95%) and (3) that cash value policies typically cost less than a term insurance policy (95%).
In the aggregate, fewer than half of the respondents accurately answered questions about the use of life insurance in retirement planning (49%), strategies for sustaining income throughout retirement (41%) paying for long-term care expenses (36%) and annuity products in retirement (20%).
Americans’ less-than-sterling performance on questions about insurance and other financial products (only one in three accurately flag the best time to convert an IRA to a Roth IRA) has fueled industry efforts to boost financial literacy.
The not-for-profit organization Life Happens (formerly the LIFE Foundation), sponsored in part by Voya Financial, offers a free web-based literacy program, Next Generation, to more than 33 million students and 150,000 teachers nationwide. In 2013, Life Happens partnered with Scholastic to unveil an upgraded version; the new program avails high school teachers of tools to educate students about financial planning and risk management, as well as life, health and disability income insurance.
At the company level, Guardian Life boasts an interactive web portal (Living Confidently) that helps consumers navigate questions about insurance, retirement, financial planning, budgeting, and entrepreneurship. In addition to other content, the site includes “12 Steps to Living Confidently: How to Protect Yourself,” a section examining the value of life, health, long-term care and umbrella insurance.
The American Institute of CPAs also aggregates content — articles, calculators and Q&As — about these and other protection products on 360Degrees of Financial Literacy. Available, too, on the site is information about funding college, budgeting and spending, retirement planning and investing, plus planning needs when hitting key life milestones.
Among them: when you can no longer care for yourself — a topic on which many Americans are not especially well informed. In respect to LTC insurance, fewer than half of The American’s College’s respondents know that the product covers Alzheimer’s care (42%), but not hospital expenses after surgery (2%) or emergency room care (0%). Nearly four in 10 (38%) believe that LTCI covers all three of these expenses.
Conducted in mid-February, the survey is based on online interviews that Research Now conducted on behalf of The American College with 1,244 Americans ages 60 to 75 with $100,000 in investable assets. The study weights the data to reflect the respondents’ participation by age, education and asset level.
