In this Section:

Advisors Can Net Big Business From $21 Trillion Protection Gap

Annuities are in a worse position than life insurance when it comes to consumer attitudes toward the products, even as the public’s need for income protection grows even larger, according to recent studies.

A Conning report pointed out that many consumer surveys have detected a significant disconnect between what consumers say about needing annuity and life products and what consumers actually do about buying those products.

Consumers will “claim that they know they need more life insurance coverage, or longevity protection in retirement,” the Hartford researchers wrote in Conning’s 2013 Life-Annuity Consumer Markets Annual Report. However, many fail to take steps to invest in annuities or to buy additional life insurance (or individual life insurance in the first place).

In 2006, for example, the “protection gap” across all demographic segments was $11.3 trillion, according to Conning estimates. “Protection gap” is the term Conning uses to refer to the capital that would be needed to replace a portion of the income of the primary householder for the period prior to normal retirement. This estimated gap more than doubled to $22.8 trillion in 2012, the report said. For 2013, the estimate is slightly smaller, at $21.2 trillion, but it “still represents a large increase over the gap that existed before the financial crisis and recession in 2008-2009,” the report said. The problem is not new, but in some markets – such as the retirement market – it appears to be growing, according to a few studies.

By implication, failure to act could make things “worse” for consumers who may end up not owning the very products that could help them meet the needs they say they have. It also could make things “worse” for the insurance and financial services industry in the sense that it contributes to lower market penetration than would otherwise be the case. And it could be “worse” for everyone if increasing numbers of citizens lack the financial essentials that help make the economy tick.

That’s not a pretty picture but the situation is not hopeless. Various experts say insurance producers and carriers can help reverse the direction, from disconnect to connect. First, the scope of the problem.

Fresh Data

It’s not just Conning that is pointing out the disconnect that exists between what consumers are saying about their financial needs and what they are doing.

Recently, two more studies came out with fresh data on the extent of the failure-to-act problem. The new studies identify the problem as it relates to saving for retirement, not specifically to failure to buy annuities or life insurance. But the findings resonate in annuity and life circles since both types of products are often purchased in whole or in part with retirement in mind.

In one study, from Employee Benefit Research Institute (EBRI) and Mathew Greenwald and Associates (MGA), nearly 70 percent of American workers said they do see the need to save for retirement, but the workers also reported amazingly low actual savings levels.

For instance, more than 50 percent reported having less than $25,000 in total household savings and investments (excluding value of the primary home or any defined benefit plans). And only 57 percent said they are saving, which represents “a continued decline from the high of 65 percent measured in 2009,” the Washington researchers said in their 2013 annual Retirement Confidence Survey.

In the other study, the latest COUNTRY Financial Security Index survey, a third of Americans said they think a middle-income family can save for a secure retirement.

That sounds somewhat promising. Perhaps they have access to the products and resources they think they will need to reach that goal.

What actually happens could be something much different, however. Only 28 percent of those aged 50 to 64 – and thus nearest to retirement – told the researchers that they think a secure retirement is possible to achieve. That’s even though 59 percent of this age group said they had started saving for retirement before age 40. This raises some perplexing questions. Did these boomers save in products that weren’t suitable for their situations? Did they have a save-and-spend lifestyle, undermining their retirement goals? Did they see the value in other options but never followed through? Did anyone teach them about diversification? Did they consult an insurance or financial specialist?

Another surprising finding from the COUNTRY Financial survey is that nearly half (42 percent) of 18- to 29-year-olds said they have not yet started saving for retirement. This is 20 points higher than Americans overall, and the highest of any age group in the survey. Talk about disconnect.


Why is This Happening?

In recent years, the financial stresses of the post-recession era are often cited as a key reason for Americans not saving more or not taking steps to act on acknowledged financial needs.

In the COUNTRY Financial survey, for example, 38 percent of baby boomers told researchers that they had to delay retirement by at least two years due to the economic downturn. Other surveys point to rising health care expenses, long-term care expenses, job uncertainty, debt levels, instability in the financial markets, and a string of other financial and economic concerns – all reasons not to act.

But researchers are finding that economic and monetary matters are not the only factors causing the disconnect between consumer saying and doing.

Where annuities are concerned, lack of understanding of the product is a factor, according to the Conning study. Consumers’ self-reported knowledge shows that “they do not feel they understand the product,” the researchers said.

In addition, “many consumers think about annuities from an investment frame, as opposed to a consumption frame,” Conning said. That leads them to focus on the loss of control of principal as well as the “investment loss” that consumers might experience from an early death.

Then there is the matter of attitude. Attitudes toward annuities as well as life insurance plus lack of consumer knowledge about these products may be contributing factors, the Conning researchers suggested. People do feel pressure around a desire to maintain lifestyle, said Mathew Greenwald, president and chief executive officer of MGA, and one of the authors of the EBRI/MGA study. Forty-one percent of workers named cost of living and day-to-day expenses as reasons for not saving more, he noted, and 18 percent said they can’t afford to save more.

However, many people know that there are things they can cut back on relatively easily, and that this would enable them to save more for retirement, Greenwald continued.

For instance, the majority of workers in previous EBRI/MGA surveys said that, yes, they could afford to save $25 a week more, or start saving $25 a week. What would they have to give up in order to do that, the researchers asked. The answers included cutting back on good-life things like entertainment, clothing expenditures and impulse spending, but the big one was cutting back on something more epicurean in nature.

“The main thing cited was eating out,” Greenwald said.

This suggests that consumer choice and perhaps certain habits and pleasure pursuits are also factors in consumer disconnects. Insurance producers and financial advisors are first to confirm that. Some people are willing to spend, they say, but if they’ve had no guidance or insurance and financial education, many tend to spend on short-term creature comforts and delights, not on long-term longevity and protection products or investments.

Where saving for retirement is concerned, two expectations are strong contributing factors, Greenwald contended. One is that many people expect to work longer, and the other is they expect they will be able to work longer. So, if they don’t think they’ll have enough money come retirement time, they figure they’ll just work a few more years. The problem is, the EBRI/MGA survey found that working longer is not always possible due to disability, ill health, job loss, inability to find new work and other factors beyond one’s control.

The role of government policy plays in this park, too. Remember the 42 percent of Generation-Xers whom COUNTRY Financial found had not started saving for retirement yet? Perhaps that’s because Gen-Xers anticipate they will be receiving more help from the government, the researchers suggested. It’s easy to see how the team arrived at that interpretations – after learning that half (49 percent) of the Gen-Xers said the “government should have a greater role in funding Americans’ retirement.”

What to Do?

Annuity and insurance professionals aren’t like innocents abroad on the disconnect issue. Neither are the carriers. Here are some steps they can take to help break the cycle of do-see but don’t-act.

Provide more education. “Increased consumer education about annuities, as well as a focus on the value of lifetime income streams, may help increase the appeal of these products,” the Conning researchers said

. Talk about tax deferral. Annuity professionals need to help workers understand the power of the tax deferral of fixed annuities in IRAs and non-qualified annuities, said Kim O’Brien, president and chief executive officer of NAFA, the National Association for Fixed Annuities. That’s in addition to urging them to make the most out of their already tax-deferred 401(k) or 403(b) plans, she wrote in an email.

Talk about the interest rate environment. The tax deferral of compounded interest – particularly in this pesky perpetual low-interest market – cannot be over-emphasized, O’Brien added.

Reevaluate target markets. Where life insurance is concerned, try changing or expanding the target marketing from what has been traditional up to now to include people who differ by gender and ethnicity or race and who may also differ in attitudes towards insurance, Conning suggested. Certain marketing messages seem to resonate more with particular demographic groups, they pointed out.

Point to tax refunds. If clients are expecting a tax refund, suggest they think about putting that money directly into a fixed annuity IRA, suggested O’Brien. The national average refund is about $3,000, so if clients do that yearly, the annuity can grow into “a very respectable retirement nest egg,” she said.


Employers can help. They should consider adding an automatic enrollment feature to the company 401(k) retirement plan, said the EBRI/MGA study. Why? This feature “has been shown to increase the number of people in the plans.” Provide resources. Choose materials and calculators that will help clients understand their needs. Nearly half of surveyed workers guessed at how much they will need to accumulate for retirement rather than doing a systematic retirement-needs calculation, pointed out the EBRI/MGA study. Meanwhile, only 18 percent did their own estimate, 18 percent asked a financial advisor, 8 percent used an online calculator and another 8 percent read or heard about how much was needed.

Remind that professionals can help. “Annuity professionals are in the best position to advise and provide product that helps consumers save routinely while protecting those savings from the markets and other economic calamities,” contended O’Brien. Meanwhile, many consumers may not even know that such expertise exists. The EBRI/MGA study found that just 23 percent of workers (and 28 percent of retirees) have obtained investment advice from a professional financial advisor who was paid through fees or commissions.

Counsel consumers to save early and often. “Plan to save at least a foundational amount by age 60,” the EBRI/MGA researchers said. The risk of waiting beyond that to build a foundation is too high.” Another suggestion for consumers came from NAFA’s O’Brien: “The first step is to take the first step.”

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

More from InsuranceNewsNet