This story appears in the November 1, 2015 issue of Forbes. Subscribe
You can buy stock with a few mouse clicks and an $8 commission. Why not an annuity?
The possibility of online annuity sales should be intriguing to any cost-conscious saver--and terrifying to any traditional insurance seller. The established way for insurance companies to move investment products is to send agents out for long, thoughtful discussions over the kitchen table. The Web is a threat to that system.
For now the door to electronic sales of retirement policies is open just a crack. Abaris, a Philadelphia business started in March by two young Wharton graduates and a fellow University of Pennsylvania alum, wants to open it wider. Through its site you can get quotes from competing annuity vendors.
A 60-year-old woman wants to put $100,000 into a longevity annuity that starts at age 80 and lasts her lifetime. This is a way to reduce the risk that she will outlive her assets and could make a lot of sense inside an IRA.Via Abaris, Guardian Life offers $2,091 a month. Pacific Life pays $2,102.
Transparency is what online quoting is all about, explains Matt Carey, chief executive of Abaris: "You should be able to compare every product that's out there in payout rates and credit ratings."
Carey envisions a system in which buying an assortment of annuities from different insurers would be as easy and as sensible as buying a portfolio of corporate bonds instead of just one. Life insurance companies do go under on occasion; Executive Life and Mutual Benefit Life both failed in 1991.
But the life insurance industry is not bursting with enthusiasm for either transparency or Internet selling. Two big players in the annuity market, Northwestern Mutual and New York Life, aren't distributing through Abaris. Guardian is playing ball but does not have in place the mechanism for the real-time quote feeds that Abaris wants.
As for agents' commissions, information is hard to come by and competition is, at the moment, faint. Carey says that his agency collects the usual fee (typically between 3% and 5%) and earns it by spending a lot of time with buyers, via Skype, phone and e-mail, and even in person, before closing a sale.
For now, that is, Abaris does not represent the threat to agents that Charles Schwab did to stockbrokers 40 years ago. Nor is an insurance-commission price war around the corner. In most states, Carey says, an "anti-rebating" law forbids agents to discount commissions.
In death-benefit insurance, to be sure, there is something to be said for protecting the income of conscientious agents who know their customers. If discounters ran rampant, we might see more such unsavory buyers as the California ladies who were taking out life insurance policies on homeless men and then running them over with cars.
Sellers of annuities, though, don't have to worry about whether the buyer is up to no good or maybe has cancer. The worst thing a customer might do would be to secretly take vitamins.
The other argument offered for anti-rebate laws is the need to protect the consumer. Buying a life annuity is irrevocable, a necessary feature of an insurance pool that takes money from people who die young and hands it to people who live to be 100. So perhaps retirees shouldn't be making the momentous decision on their own.
Keith Moeller is a financial advisor in Minneapolis who sells deferred annuities from Northwestern Mutual but typically as part of a larger plan involving a careful analysis of retirement spending. He recently had a 68-year-old put 10% of his retirement account in an annuity that will start at age 70½, 10% in another that will start at age 75 and the rest in a portfolio of stocks and bonds.
A plan involves psychology as much as mathematics. "Most of the conversations with clients are about 'How do I do this?' They are going to be closing the door on a job for the last time," says Moeller. A computer screen can't do that kind of hand-holding.
But what if you are a committed do-it-yourselfer and want no hand-holding at all? If you are expecting salvation at Vanguard, the no-load fund house, you may be a bit disappointed. Its annuities carry a sales load (2%) and feature second-tier insurers, like AIG subsidiary American General Life.
For now, old-fashioned agents have a grip on most of the desirable inventory, namely, policies from firms with A++ credit ratings. Carey is nonetheless hopeful about winning over more insurers to his annuity bazaar. "Consumers are migrating online," he says. "The world is changing. This industry will change, too." Slowly.
