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The nexus between investor sophistication and annuity insurance ownership: evidence from FINRA's National Financial Capability Study

The nexus between investor sophistication and annuity insurance ownership: evidence from FINRA's... Although annuitization provides insurance against longevity risk that can benefit households, researchers have uncovered an annuitization puzzle, which suggests households are reluctant to annuitize their wealth. This study contributes to the discussions on the annuitization puzzle by examining investor sophistication and owning annuities in non-retirement accounts.Design/methodology/approachThe study utilizes data from the 2018 U S National Financial Capability Study (NFCS). The empirical analyses are based on logistic regression estimates of annuity ownership on investor sophistication. Interpretations are based on odds ratios.FindingsThe findings indicate that investor sophistication contributes to the annuity puzzle. Investors with low objective and high subjective investment knowledge (overconfident investors) are more likely to own annuities compared to those with low objective and low subjective investment knowledge. However, investors with high objective and low subjective investment knowledge (under-confident investors) are less likely to choose annuity ownership compared to those with low objective and low subjective investment knowledge. The findings and ensuing discussion highlight the importance of annuitization when planning for retirement, with implications for financial service professionals.Research limitations/implicationsThe measure of investor sophistication does not assess the difficulty level of each financial knowledge question. The questions used to construct the investor sophistication variable are based on general investment knowledge. In addition, the annuity ownership variable used in this study pertains to investments outside retirement accounts. Despite these limitations, the findings highlight the importance of annuitization when planning for retirement.Originality/valueUnlike prior studies, the authors consider four mutually exclusive measures of investor sophistication constructed from measures of objective and subjective investment knowledge to understand the effect of investor sophistication on annuity ownership in the United States. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Finance Emerald Publishing

The nexus between investor sophistication and annuity insurance ownership: evidence from FINRA's National Financial Capability Study

Managerial Finance , Volume 49 (2): 22 – Jan 26, 2023

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References (53)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
0307-4358
DOI
10.1108/mf-04-2022-0169
Publisher site
See Article on Publisher Site

Abstract

Although annuitization provides insurance against longevity risk that can benefit households, researchers have uncovered an annuitization puzzle, which suggests households are reluctant to annuitize their wealth. This study contributes to the discussions on the annuitization puzzle by examining investor sophistication and owning annuities in non-retirement accounts.Design/methodology/approachThe study utilizes data from the 2018 U S National Financial Capability Study (NFCS). The empirical analyses are based on logistic regression estimates of annuity ownership on investor sophistication. Interpretations are based on odds ratios.FindingsThe findings indicate that investor sophistication contributes to the annuity puzzle. Investors with low objective and high subjective investment knowledge (overconfident investors) are more likely to own annuities compared to those with low objective and low subjective investment knowledge. However, investors with high objective and low subjective investment knowledge (under-confident investors) are less likely to choose annuity ownership compared to those with low objective and low subjective investment knowledge. The findings and ensuing discussion highlight the importance of annuitization when planning for retirement, with implications for financial service professionals.Research limitations/implicationsThe measure of investor sophistication does not assess the difficulty level of each financial knowledge question. The questions used to construct the investor sophistication variable are based on general investment knowledge. In addition, the annuity ownership variable used in this study pertains to investments outside retirement accounts. Despite these limitations, the findings highlight the importance of annuitization when planning for retirement.Originality/valueUnlike prior studies, the authors consider four mutually exclusive measures of investor sophistication constructed from measures of objective and subjective investment knowledge to understand the effect of investor sophistication on annuity ownership in the United States.

Journal

Managerial FinanceEmerald Publishing

Published: Jan 26, 2023

Keywords: Annuity; Financial literacy; Financial sophistication; Investor sophistication; Retirement planning

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