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

Thomas Korankye (Personal and Family Financial Planning Program, University of Arizona, Tucson, Arizona, USA)
Blain Pearson (E Craig Wall Sr College of Business Administration, Coastal Carolina University, Conway, South Carolina, USA)
Hossein Salehi (School of Management, California Lutheran University, Thousand Oaks, California, USA)

Managerial Finance

ISSN: 0307-4358

Article publication date: 16 September 2022

Issue publication date: 26 January 2023

147

Abstract

Purpose

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/approach

The 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.

Findings

The 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/implications

The 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/value

Unlike 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.

Keywords

Acknowledgements

Data availability statement: This paper uses the publicly available dataset from the U.S. National Financial Capability Study. It can be found at https://www.usfinancialcapability.org/downloads.php.

Disclosure of potential conflicts of interest: The authors declare that there is no conflict of interest.

Research involving Human Participants and/or Animals: The authors declare that this statement is not applicable because we used secondary dataset from the US National Financial Capability Study (https://www.usfinancialcapability.org/downloads.php).

Informed consent: The authors declare that this statement is not applicable because we used secondary dataset from the US National Financial Capability Study (https://www.usfinancialcapability.org/downloads.php).

Citation

Korankye, T., Pearson, B. and Salehi, H. (2023), "The nexus between investor sophistication and annuity insurance ownership: evidence from FINRA's National Financial Capability Study", Managerial Finance, Vol. 49 No. 2, pp. 398-419. https://doi.org/10.1108/MF-04-2022-0169

Publisher

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Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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