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Demand for annuities: Price sensitivity, risk perceptions, and knowledge

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  • Boyer, M. Martin
  • Box-Couillard, Sébastien
  • Michaud, Pierre-Carl

Abstract

The demand for voluntary individual lifetime annuities is low, as merely 10% of soon-to-be retired Canadians care to buy such contracts. To assess the reasons why, we design a stated-preference experiment in which we vary characteristics of annuity contracts to estimate individuals’ sensitivity to an annuity’s money’s worth (that is, the value-to-cost ratio). Using different measures of longevity risk and survival expectations, we investigate how knowledge of annuity products and mortality risk misperceptions affect the take-up and the sensitivity of the demand for annuities. We find that annuities are objectively actuarially neutral in general (meaning that annuity premiums are equal to their expected payment), and can appear to offer great value for the money given an individual’s subjective mortality risk. We also find that demand is somewhat price-inelastic so that lowering the price of annuities could increase demand by at most 2 percentage points for a base of 10%. Lack of knowledge of annuities explains another 0.8 percentage points. We find limited additional interest for deferred annuities compared to immediate annuities, although respondents are less sensitive to deferred annuity prices.

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  • Boyer, M. Martin & Box-Couillard, Sébastien & Michaud, Pierre-Carl, 2020. "Demand for annuities: Price sensitivity, risk perceptions, and knowledge," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 883-902.
    • Handle: RePEc:eee:jeborg:v:180:y:2020:i:c:p:883-902
    DOI: 10.1016/j.jebo.2019.03.022
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    2. Cormac O'Dea & David Sturrock, 2019. "Survival pessimism and the demand for annuities," IFS Working Papers W19/02, Institute for Fiscal Studies.
    3. David Landriault & Bin Li & Hong Li & Yuanyuan Zhang, 2024. "Contract Structure and Risk Aversion in Longevity Risk Transfers," Papers 2409.08914, arXiv.org.
    4. Hwang, In Do, 2024. "Behavioral aspects of household portfolio choice: Effects of loss aversion on life insurance uptake and savings," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 1029-1053.
    5. Ismael Choinière-Crèvecoeur & Pierre-Carl Michaud, 2023. "Reverse Mortgages and Financial Literacy," CIRANO Working Papers 2023s-06, CIRANO.
    6. Milevsky, Moshe A. & Salisbury, Thomas S., 2022. "Refundable income annuities: Feasibility of money-back guarantees," Insurance: Mathematics and Economics, Elsevier, vol. 105(C), pages 175-193.
    7. Ismaël Choinière Crèvecoeur & Pierre-Carl Michaud, 2021. "Low Demand for Reverse Mortgages in Canada: Price, Knowledge or Preferences?," Cahiers de recherche / Working Papers 2107, Chaire de recherche sur les enjeux économiques intergénérationnels / Research Chair in Intergenerational Economics.
    8. Shang Wu & Hazel Bateman & Ralph Stevens & Susan Thorp, 2022. "Flexible insurance for long‐term care: A study of stated preferences," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 89(3), pages 823-858, September.
    9. Vladimír Baláž, 2023. "Indulgence, Self-Control, and Annuity Preferences: Annuity Choices by Members of the Slovak-Funded Private Pension Pillar," Social Sciences, MDPI, vol. 12(3), pages 1-17, March.
    10. Hazel Bateman & Inka Eberhardt, 2024. "How Fact Sheets affect retirement income product knowledge, perceptions and choices," Australian Journal of Management, Australian School of Business, vol. 49(2), pages 119-141, May.
    11. Vladimír Baláž, 2023. "Household Economics, Information Sources and Annuity Choices: Annuitisation Preferences of Members of the Slovak Private Pension Pillar," Economies, MDPI, vol. 11(4), pages 1-16, April.
    12. Patil, Vikram & Veettil, Prakashan Chellattan & Yashodha, Yashodha, 2021. "Understanding Farmers’ Low Uptake of Crop Insurance in India: A Discrete Choice Experiment Approach," 2021 Conference, August 17-31, 2021, Virtual 315232, International Association of Agricultural Economists.

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    More about this item

    Keywords

    Life annuities’ money’s worth; Stated preferences; Subjective survival probabilities;
    All these keywords.

    JEL classification:

    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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