An Annuity People Might Actually Buy

Anthony WebbGuan Gong Wei Sun

IB#7-10

Introduction

Immediate annuities provide insurance against outliving one’s wealth.  Previous research has shown that this insurance ought to be valuable to risk-averse households facing an uncertain lifespan.  But rates of voluntary annuitization remain extremely low.  Many explanations have been offered for retired households’ reluctance to annuitize.  One prominent explanation is that annuities suffer from a considerable degree of actuarial unfairness.  That is, for the average household, the expected value of the income, discounted by a rate of interest and annual survival probabilities, is considerably less than the premium paid.  But it seems likely that households are also influenced by a reluctance to give up access to their life savings…