I recently had the opportunity to conduct a poll of more than 500 randomly selected insurance agents, and one of the questions had to do with the popularity of annuities relative to bank products.
Here was the question:
By how much do you believe the sum of all domestic deposits in U.S. banks exceeds the sum of annuity reserves held by U.S. insurance carriers?
- $3 in banks per every $1 in annuities
- $10 in banks per every $1 in annuities
- $50 in banks per every $1 in annuities
- $100 in banks per every $1 in annuities
Pick your answer (and be prepared to be surprised).
Annuities have relatively low consumer awareness
If you were to go outside and randomly ask the next person who comes down the street about bank CDs, chances are that person would know where to buy a CD, that they are available in different durations, and that they have an interest rate set by the bank that is guaranteed for the duration chosen. If you were to ask about savings accounts, chances are the person would know that they protect your money, credit interest, and are insured by the federal government.
In contrast, if you were to ask that same person about annuities, you would probably be greeted with a blank stare. Most people don't know much about how annuities work, and they would have little idea where to go buy one.
The difference in product awareness with consumers is not surprising. Banks have made a massive investment in branch offices. Bank of America, for example, has more than 6,000 local branches. Each of these branches is staffed with salaried sales and service people.
Functioning in today's society demands that nearly everyone who has money must have a checking account, thus almost every consumer has at some point walked into a bank, and many people go to the bank quite frequently. Chances are that when you were still just a child, you learned about the importance and value of opening a bank account from a parent or teacher.
Compare that to insurance carriers that offer annuities. They have few or no local branches, few or no salaried local sales or service people, and little product awareness among consumers. They also rarely advertise their products directly to consumers.
Therefore, it would not be surprising if the sum of all domestic deposits in U.S. banks greatly exceeded the sum of annuity reserves held by U.S. insurance carriers.
Perception versus reality
But, chances are your perception is quite different from reality. Here is how agents responded to the survey:
- 45 percent said there is about $100 in banks per every $1 in annuities
- 28 percent said there is about $50 in banks per every $1 in annuities
- 14 percent said there is about $10 in banks per every $1 in annuities
- 13 percent said there is about $3 in banks per every $1 in annuities
Here is the real answer: Per the FDIC, the total amount of domestic deposits in U.S. banks is $7.7 trillion.1
This isn't just CDs owned by individuals; this is all types of accounts owned by all types of entities, such as checking accounts owned by major corporations, and so forth.
Per the American Council of Life Insurers, the total amount of annuity reserves held by U.S. carriers is $2.2 trillion.2
So, the correct answer is that there is only about $3.50 in banks per every $1 in annuities.
Surprised? Annuities are more popular than you think.
Reasons for the popularity of annuities
Why are annuities so popular? One reason is that insurance agents are a very effective distribution system. For example, by using independent agents, insurance carriers can tap into an experienced, motivated sales force without needing to build branches or hire local staff. Independent agents are paid entirely on commission, so they would not be able to survive in their careers unless they were very effective at what they do.
Another key reason is that annuities are attractive financial products that offer certain advantages over bank products. Annuity products tend to offer a very appealing combination of safety features and higher interest crediting potential, a combination that many consumers desire for their retirement savings.
Thanks to their FDIC insurance, bank products have the appeal of eliminating default risk up to the insured limits. But banks tend to offer such low interest rates on deposits that money deposited there, after inflation and taxes, loses purchasing power over time. Many consumers recognize that money left in the bank for the long haul -- such as for retirement savings -- often isn't really safe, because you're effectively losing money gradually. Over many years, the loss of purchasing power can be quite significant.
To have real safety over the long run, it makes sense to have a better balance of safety features and growth potential, and consumers often perceive that annuities can provide the desired balance.
So, have confidence offering annuities. You are offering a surprisingly popular financial product.
1 http://www2.fdic.gov/qbp/2009dec/qbp.pdf, table III-B, FDIC Quarterly Banking Profile, Statistics At A Glance as of 12/31/2009, $7.7 trillion of domestic deposits
2 http://www.acli.com/NR/rdonlyres/0BFEABCA-1E2A-4F4C-A879-95CF104238AB/22609/FB0809Annuities1.pdf, table 8.2, ACLI Life Insurers Fact Book 2009, $2.2 trillion of annuity reserves
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