Are Income Annuities Fair?
An off-kilter idea of fairness may be getting in the way of some people's long-term plans for guaranteed income.

If you get a chance, you might read this article, “Why Retirees May be Wary of Annuities.” Written by two knowledgeable academics and based on a study of consumers, the authors conclude that investors’ aversion to income annuities may be related more to a question of fairness than the value of the investment itself.
At the crux of the issue is the question of whether it’s fair that an insurance company can hold on to part of the money a person pays into an annuity if they die before getting their premium back in annuity payments.
Basically, there is a group of people who simply feel that deal is not right. They can’t get behind the shared risk model at the heart of annuities, which is that early deaths help subsidize the payments for those who live beyond their life expectancies.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
At the end of the article, the authors suggest that what’s needed for annuity acceptance is a “highly personalized approach, in which the [planning] solutions are tailored to reflect the goals, circumstances of the individual.”
As an actuary by training and a designer of novel forms of income annuities, I may be the wrong person to ask whether they are fair. Like Social Security and pension plans, they enable group risk sharing and higher payments. When I look at fairness, I look at the pricing of the annuity payments — and I happen to be comfortable with the competitive marketplace for income annuities.
Here’s a point-by-point response to the study participants who expressed the fairness issue:
1. ALL insurance is based on the pooling and sharing of risk.
Who has paid for fire insurance and not had a fire, or paid life insurance premiums to cover a mortgage and lived until it was paid off — and didn’t get their premiums back? The peace of mind and protection from knowing you were covered is only possible if your reserve pays for the claims of other people who are insured. In the same way, while income annuities are paid for with an upfront premium, the pooling still exists.
2. What if you’re not convinced by the risk-sharing argument?
If you still believe it’s unfair, then buy some protection for your beneficiary — either through the income annuity itself or through a separate life insurance policy. If you do it through the income annuity, it will lower your income, but if it makes you feel better then go ahead. In that case the insurance company is holding on to a smaller part of your reserve and paying it to your beneficiaries.
3. You are getting paid for this loss of reserve in higher annuity payments.
When you are buying an annuity, what you are doing is generating more income without taking investment risk. In effect, you are “selling” this part of your legacy to the insurance company, which pays you back in guaranteed income. Often these are called longevity or mortality credits.
But enough of these technical arguments in favor of the income annuity as a singular product. The bigger issue in evaluating income annuities is that they are posed as an either/or product purchase decision rather than as a how/how much retirement planning decision. For example, very few investors would buy junk bonds or emerging market equities unless they were part of a diversified investment portfolio.
Similarly, you should look at your entire retirement income plan with and without income annuities and decide which is better, looking at all of the aspects of the plan. From legacy early in retirement to liquidity in mid-retirement to income late-in-retirement.
The problem for the consumer is that most sellers of income annuities don’t present them in the context of the personalized (planning) solution the study’s authors suggest. The people selling annuities are often life insurance agents and not investment advisers. So, in our view, consumers considering income annuities should consider them as simply part of a retirement portfolio, just like bonds, and find advisers who share the same perspective.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Jerry Golden is the founder and CEO of Golden Retirement Advisors Inc. He specializes in helping consumers create retirement plans that provide income that cannot be outlived. Find out more at Go2income.com, where consumers can explore all types of income annuity options, anonymously and at no cost.
-
Stock Market Today: Stocks Are Mixed Before Liberation Day
Markets look forward to what comes with the reordering of 80-year-old global trade relationships.
By David Dittman Published
-
Stagflation: What It Is and Why Retirees Should Care
Stagflation — the economic bogeyman of the 1970's — may return to the US. Here's what it could mean to your retirement.
By Donna Fuscaldo Published
-
What You Don't Know About Annuities Can Hurt You
Lack of awareness leads many to overlook these potent financial tools, and with the possibility of running out of money in retirement, that could really hurt.
By Ken Nuss Published
-
Three Keys to Logical Investing When Markets Are Volatile
Focusing on these market fundamentals can help investors stay grounded rather than being swayed by emotion or market hysteria.
By Dennis D. Coughlin, CFP, AIF Published
-
Yes, the Markets Are Spooked, But You Don't Have to Be
It's human nature for investors to freak out in a downturn. But with a little discipline, you can overcome the urge to sell and stay focused on long-term goals.
By Jimmy Lee, IAR Published
-
Remembering Bogle: A New Standard for Municipal Investing
Improvements in technology, data, systematic trading and risk analytics have led to more successful municipal indexing.
By Paul Malloy Published
-
Winning Strategies for Financial Advisers as Clients' Lives Evolve
How can the wealth management industry help make life transitions easier for the adviser and the client?
By David Conti, CPRC Published
-
How Advisers Can Establish Relationships With HNW Prospects
These strategies can help to build influence with high-net-worth individuals, who are often looking to an adviser for insight rather than solutions.
By Jeremy Green, CFP®, CTFA, CLU®, CEBS®, AEP®, EA, MSFS Published
-
When Your Car Is Fixed, But You've Still Got the Problem
This reader's experience with trying to get squealing brakes fixed under an extended warranty mirrors what others are experiencing these days.
By H. Dennis Beaver, Esq. Published
-
Seven Questions to Ask When Evaluating Personal Loan Options
Taking out a personal loan too hastily could lock you into unfavorable terms with an untrustworthy lender. Ask these questions before signing anything.
By David Kimball Published