The Annuity Defined … Really?

May 30, 2012

By Linda Koco

What is an annuity? Advisors run into that question a lot. Despite the fact that annuities have been around for years, many consumers just don’t get it.

That lack of understanding gets in the way of good retirement income planning. If people don’t know about, or understand, annuities, why should they consider purchasing one to help finance their retirement years?

Fortunately, most annuity professionals have their definitions down pat, and they are proficient at simplifying the words and drawing analogies to help a client understand. In addition, they have company materials they can give to the client that provide more information.

The Internet problem

Unfortunately, a lot of consumers do their research about insurance products on the Internet, and that bollixes things up. This is because much of the information they get on the net comes from non-annuity industry resources. 

Today, for instance, a search on “what is an annuity” turned up, on page one, definitions from Wikipedia, the Merriam-Webster - The Free Dictionary and even WiseGEEK. 

Five definitions did come from financial-related websites — Investopedia, BankRate, Personal Dividends, Money.CNN and the Securities and Exchange Commission (SEC)—but again, these are not annuity industry sources.

Only two definitions were from insurance entities—the Insurance Information Institute and AXA Equitable.

The good news is that web surfers who happen to click onto web pages two and up will find plenty of annuity industry definitions. But, if the appetite for information is already sated by reading the page one definitions, a lot of people won’t even bother to click deeper into their search results. It is a known fact that page one of search results gets the most clicks.

Besides, most people don’t go around thinking, “I want to hear about what the annuity industry has to say about that.”

This means the annuity industry will not have much success with educating consumers, in its own words, on “what is an annuity” via Internet search.

Some definitions are flawed

If the page one definitions are accurate and clear, perhaps this is not a huge problem. But a quick scan through the definitions in the above search reveals that, although most are reasonably accurate, several have flaws.

For instance, some present terms and concepts in the definition that themselves need defining. For example, the WiseGEEK definition rightly points out that annuities involve distribution of money and are typically part of a retirement plan to ensure a fixed, stable income. But it says this income goes to an “annuitant, or recipient.” That reference to annuitant or recipient will cause a lot of consumer eyes to glaze over. “What is an annuitant?” They will wonder.

To its credit, the website does highlight the word annuitant, so the curious can click the link to find out. But how what percentage of web visitors will click on through to find out?

The website does anticipate the problem, and so adds the words “or recipient” right after the word annuitant. It gets a star for doing that. However, the term recipient is still a few heartbeats away from where curious readers might want to be. It is dry and seems to be about someone else.  The content that follows the definition does provide some amplification, but if the reader is already stumped or disengaged, it may be for naught.

By comparison, annuity professionals typically do not mention the word annuitant to a consumer until much later in the conversation. They have learned, from many years of experience, that this word is hard for most people to swallow. For them, the fewer the technical terms the better, especially early on.

Making it personal

Many advisors will introduce the annuity payout idea by using simple terms and making it personal. For instance, they might say the annuity pays an income stream to you.

The SEC did get that part right. Its annuity definition says that an annuity is “a contract between you and an insurance company that is designed to meet retirement and other long-range goals, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date.”

That’s not bad. In fact, it’s pretty good. However the references to making a “lump-sum payment or series of payment” and to the insurer making “periodic payments” sort of gums it up—because this does not say the payments are money.  Naturally, most people know that “payments” entail money. But more people seem to lock onto to the word money than they do to the words making payments. 

Also missing from the SEC definition is reference to the annuity’s ability to pay the consumer a regular income. It does talk about periodic “payments” but not income. The word choice is unfortunate. It is likely that more consumers can visualize what the product does upon learning that it that pays out a regular income, such as monthly, quarterly, etc. as compared to learning that it will make periodic payments.

Some of the other definitions use lengthy sentences to express the thoughts when short ones would read more smoothly. A few have legalistic overtones (i.e., “when an insured party…”). One even mentions the A-word, annuitization, right in the definition.  Ugh.

The point is, several of the annuity definitions don’t hit the consumers where they live, in language they might use in everyday life.   

An insurance industry definition

Now consider the following definition from the Insured Retirement Institute, an insurance trade group with deep knowledge of annuities and growing consumer outreach. This definition says an annuity is “an insurance agreement that comes in a number of different forms and can (1) help individuals accumulate money for retirement through tax-deferred savings, (2) provide them with monthly income that can be guaranteed to last for as long as they live, or (3) do both.”

This definition is absent the “you” terminology but it does talk in terms of money and guaranteed income. Unfortunately, this definition does not pop up on page one of the annuity definition results. That’s really too bad.

There was a time, in the 1990s, that some financial writers tried to define a particular type of annuity — the variable annuity — as a basket of mutual funds in a tax-deferred wrapper. That roiled a lot of industry experts since the definition made no mention of insurance, guarantees, or monthly income. But it hung on for quite a while, because it was like a “handle” — short and sweet, easy to say and remember.

That nomenclature has now faded. However, figuring out how to define the annuity accurately and clearly to consumers continues to be a problem. It’s great that industry insiders get it, but potential annuity buyers need to get it, too.

Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].

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