Demand for Annuities: Price Sensitivity, Risk Perceptions, and Knowledge

To assess the reasons behind low demand for voluntary individual lifetime annuities, we designed an experiment with varying characteristics of annuity contracts, in order to estimate individuals’ sensitivity to their value-to-cost ratio (or money’s worth). Using different measures of objective longevity risk and subjective survival expectations, we investigate how product knowledge and mortality risk misperceptions affect the take-up of – as well as the sensitivity of the demand for – annuities. We find that annuities are not priced fairly, although they can appear to be fairly priced given an individual’s subjective mortality risk. We also find that, given their current 10% take-up rate, lowering the price of annuities to fair actuarial levels could increase demand by at most 2 percentage points. Lack of knowledge of annuities explains another 1.2 percentage points.