How Much Do People Value Annuities and Their Added Features?

A longstanding puzzle in the economics of insurance, household finance, and public policy is why so few individuals annuitize their wealth. This paper describes results from a recent survey of people with investable assets over $100,000 that included a randomized control trial module eliciting individuals’ valuations for a simple immediate annuity, as well as whether they are willing to pay more for annuities with survivor benefits or with a liquidity clause allowing them to withdraw the remaining premium. The major result suggests that half of those surveyed want to annuitize at prevailing market annuity prices, a much higher share than the 12 percent of this group who actually do buy annuities. In terms of annuity features, individuals are unwilling to pay more for a death benefit or a liquidity option, underscoring that it is not supposedly aversive features of annuities preventing more widespread adoption. Moreover, the analysis calibrates a lifecycle model using the Health and Retirement Study. With reasonable preference parameters, the model suggests that annuitization rates for individuals with investable assets over $100,000 should be even higher than 50 percent, further suggesting that the wedge between the 50 percent that want to annuitize and the 12 percent that do is not due to preferences or economic circumstances. The results find support for “channel factors†– difficulties associated with actually purchasing an annuity – as a major impediment to annuitization.