The idea behind an annuity is that, in exchange for an upfront investment, it guarantees you an agreed-upon income for the rest of your life. But annuities have never sold as well as most economists think they should and no one seems to know why.
Two Boston College marketing professors say they think they have found the answer: people don't like to think about dying.
This doesn't appear to make sense on the surface. After all, the whole idea of an annuity is that it keeps you from outliving your money -- no small concern in an era when people are routinely living into their 90s. You may be old, tired, sick, or whatever, but at least you have a few bucks coming in each month. But the process of setting up an annuity forces you to think about how long you have left and therein lies the rub, says Gergana Nenkov, Associate Professor of Marketing with the Carroll School of Management at Boston College.
"When you think about an annuity, you have to think about how long you have left to live, how many years you need to finance," says Nenkov. "You have to think about dying -- that's part of the annuity process, and when people do that, it turns them away."
Hoping it goes away
Previous explanations for Americans' poor record of annuity purchases have focused on low retirement savings, unfair pricing, and decreased flexibility in accessing one's money.
Nenkov and fellow BC professor Linda Court Salisbury say they applied psychological theory to answer the question that's usually posed in economic terms.
"Nobody has ever looked at it from the psychology of making the decision and going through with the decision," says Salisbury. "Our idea was the averseness of thinking about your own death is enough to make you use what we call 'mortality salience defense strategy,' which is to avoid it."
In other words, by not thinking about death and not planning for it, we're hoping it will go away. The theory was supported in four studies that included 748 adults.
One study asked participants whether they would rather roll their retirement savings in an Individual Retirement Account, or purchase an annuity.
"When people considered an IRA, very few thought about dying or how long they have left to live," says Nenkov. "But when the people considered an annuity, a big proportion of them had those kinds of thoughts related to death."
Two of the studies presented participants with annuity descriptions that contained subtle differences. One description indicated the annuity "guaranteed payments for as long as you live," while another "guaranteed payments for as long as you live until you die." Whenever an annuity mentioned death, interest plummeted.
"We showed that even those subtle mentions of death decreased further the rate of choosing an annuity and made people stay away from the product even more than if we just talked about years left to live," says Nenkov.
It's not just annuities, of course.
"Wills, life insurance, estate planning -- all of those decisions are sometimes put off, and we think this issue of not wanting to think about death has a role," says Nenkov. "Maybe finding ways to deal with that anxiety could help consumers overcome it and make the important decisions because if they don't, there are devastating consequences later in life."