New York Life Immediate Annuitites

9-510-040
REV: MARCH 30, 2011
JULIO J. ROTEMBERG
JOHN T. GOURVILLE
Neew York
k Life and
a Imm
mediatte Annu
uities
In July 2009, Teed Mathas, thhe chairman and CEO of New York Life L Insurancee Company (N NYL),
was satisfied
s with the bet he haad placed on immediate
i an
nnuities back in 2002. An immediate
i annnuity
was a financial prooduct sold to
o a current orr soon-to-be retiree.
r In thee annuity’s simmplest form, a 65-
year-o
old person would
w give NYL
N a lump sum, say $1000,000. In retturn, NYL would w providee that
person with a guarranteed incomme stream, sayy $650 a month, for the resst of his or herr life.
In 2002, immed diate annuitiees were a som

mewhat negleected $120 miillion annual business for NYL.
But because
b Amerricans were living longerr and becausse corporations were cuttting back on their
retiremment benefits, Mathas saaw immediatee annuities as a the ideal vehicle
v to gu
uarantee retirrees a
lifetim
me income. ByB 2008, firstt under Matthas and lateer under NY YL’s senior vice-presidentt Paul
Pasterris, immediatte annuities had
h grown in nto a $1.4 billiion business for NYL, maaking the com mpany
the un ndisputed lea
ader in the field (see Exhiibit 1). To daate, the growtth had been achieved
a prim
marily
through (1) the effforts of NYL L’s 11,500 inssurance agentts, (2) joint efforts
e with several
s bankss, and
(3) a recent
r cooperative marketiing campaign n with the non nprofit interesst group AARRP.1
Noow, NYL’s ex xecutive vice--president Chhris Blunt, wh

ho had been put
p in chargee of the immeediate
annuiities business in 2008, wan nted to take th
he business to
o the next lev
vel. Blunt thou
ught that NYL
L had
a channce to sell a very
v large volume of immeediate annuitiies through thhe roughly 5000,000 indepen
ndent
and company-bas
c ed investmen nt advisors in
i the United d States who o helped peo ople manage their
retirem
ment assets. To do this, he h wanted to o make a mu ollar investment in peoplee and
ultimillion-do
resources to try to convince thesse investmentt advisors to sell
s NYL’s im mmediate annu uities.
Booth Blunt and d Mathas kneew this woulld be an uphill battle, how wever. Historrically, investtment
adviso ors preferred to actively manage
m their clients’
c funds,, whereas an immediate annnuity repressented
an irrrevocable onee-time transacction. In addiition, most addvisors favorred a fee-baseed business model
m
ratherr than one inn which they y would receiive only a on ne-time comm mission. Commplicating maatters,
researrch suggested d that consummers were alm most completely unawaree of the existeence or beneffits of
immeediate annuitiies. Yet Math has had faceed doubts about this prod duct before, and he genu uinely
believ
ved that, in the ever-chan nging landscaape of retiremment planning g, immediatee annuities offfered
great benefits for th
hose in or appproaching theeir retirementt years.
1 Form
merly the America
an Association of
o Retired Person
ns, a nonprofit meembership organ
nization for peop
ple age 50 and ov
ver.
______________________
__________________________________________________________________________________________________
Professoors Julio J. Rotembeerg and John T. Go

ourville prepared th
his case. HBS cases are developed soleely as the basis for class discussion. Cases
C are
not inten
nded to serve as enndorsements, sourcces of primary data, or illustrations of effective or ineffecctive management.
Copyrigght © 2009, 2010, 20

011 President and Fellows
F of Harvard
d College. To order copies or request permission
p to repro
oduce materials, caall 1-800-
545-76855, write Harvard Bu
usiness School Pubblishing, Boston, MA
M 02163, or go to www.hbsp.harvard
w d.edu/educators. This publication maay not be
digitized
d, photocopied, or otherwise reprodu
uced, posted, or tran
nsmitted, without the
t permission of Harvard
H Business School.
S
This document is authorized for use only in Prof Sreeram Sivaramakrshnan (Visting Faculty)) 's PG/IMTG/2023/253 (3) at Institute of Management Technology - Ghaziabad (IMT) from Feb
2023 to Aug 2023.
510-040 New York Life and Immediate Annuities
New York Life

In 2009, New York Life was the third-largest life insurance company in the United States, after
MetLife and Prudential Financial. Through its network of agents and subsidiaries, it offered life
insurance, long-term care insurance, immediate annuities, investment annuities, mutual funds,
retirement planning services, and institutional asset-management services.
In 2008, across these product lines, NYL had nearly $250 billion in assets under management, $14
billion in operating revenue, and $1.28 billion in operating profits (see Exhibit 2). These figures
placed the company 76th in Fortune’s 2009 ranking of the top U.S. firms.
Starting with its founding in 1845, NYL also was distinguished by being a mutual insurance
company. Unlike a stock-based insurance company, a mutual insurance company was owned by and
run for the benefit of its policyholders. As such, any profits it earned typically were either reinvested
in the company for the benefit of its policyholders or paid to policyholders in the form of a dividend.
(NYL had paid a dividend in every year since 1854.)
Commenting on the benefits of mutualization in the wake of the 2008 financial crisis, Sy Sternberg,
then NYL’s Chairman of the Board, noted:
Back in 1997, most mutual life insurance companies decided to demutualize and become
public companies, so that they might have access to public capital. We decided against that
move for two reasons. First, insurance is a long-term business requiring long-term perspective
in decision-making, a discipline best not compromised by the short-term outlook of Wall
Street. Second, we saw an inherent conflict between policyholder priorities, which demand we
maximize the amount of capital we hold to protect the promises we make, and the public
company priority of minimizing capital in order to increase return on equity and improve
performance for shareholders.2
Indeed, whether through foresight or luck, at the start of 2009 NYL was one of only three life
insurance companies (the others being TIAA-CREF and Northwestern Mutual) to earn the highest
possible financial strength rating from each of the four major rating agencies—Moody’s, Standard &
Poor’s, Fitch, and A.M. Best. In contrast, most other life insurance companies had been downgraded
during the 2008 financial crisis.
Selling Life Insurance

In 2008, New York Life had more than $781 billion in active life insurance policies on its books,
covering more than 5 million individuals. Many of these policies required that policyholders make
payments for as long as they lived, with their heirs receiving a specified lump sum at the time of their
death. Most often, these policies were sold by one of 11,500 NYL agents. The typical agent was in his
or her late forties and was a college graduate. Most were hired in their thirties, and many previously
were teachers or salespeople. All new hires were put through a four-year training program in which
they learned about the industry, about NYL, and about selling NYL products. Mathas described the
hiring and training of agents as follows:
Each year we bring in about 3,000 new agents. We put them through a rigorous training
program spread over four years, at the end of which roughly 20% remain. The other 80% either
opt out, because selling insurance is not for them, or are asked to leave, because they do not
meet our standards.
2 New York Life, 2008 Annual Report, p. 9.
2023 to Aug 2023.
New York Life and Immediate Annuities 510-040
If they make it through this initial training period, however, annual retention rates
approach 90%. Part of this is due to the high compensation agents enjoy, with the median
income for a seasoned agent being $100,000 and with the top 30% of agents earning in excess of
$300,000. And, importantly, these incomes were purely commission-based. For example, an
agent who sells a $500,000 life insurance policy with an annual premium of $4,000 would
receive a commission equal to 50% of the first year’s premium on that policy and a residual
commission of about 3% of the premium in all subsequent years.
Part of NYL’s high agent retention rate also was due to the client base agents built up. Within 10
years, most agents had a base of 500 to 700 clients, with each client typically buying one or two NYL
products. The target customer most often was in the middle market, such as a family of four with
young children and $70,000 in income. Sales to such clients were driven largely by life events—for
example, a new job or a new child—that caused potential clients to assess their need for life
insurance, disability insurance, or investment planning. Then, over time, agents and their clients
tended to grow old together, with an agent increasingly providing asset management services and
retirement planning advice. As a result, many agents formed strong bonds with their clients.
For these reasons, NYL’s agents were widely regarded as some of the best in the business,
motivated not only by the commissions they earned but also by a belief in the value of the products
they sold. In thinking about which of these products an agent might choose to sell, Blunt commented:
About 40% of our agents sell a balanced mix of products across our portfolio. But many
others, say 50%, sell mainly life insurance, with a sprinkling of long-term care and annuities
thrown in. And another 10% tend to focus on annuities and mutual funds, and not so much on
life insurance. In these latter two groups, an agent gets really good at selling one or two types
of product and focuses his or her energies there. As a result, getting them to embrace NYL
products outside of their favorites is sometimes difficult to do.
The Changing Retirement Picture

After World War II, most Americans financed their retirement from two sources—Social Security
and company pensions. The government-run Social Security system levied taxes on an individual
while he or she worked and promised lifelong monthly payments upon retirement, with the
magnitude of these payments linked to that individual’s contributions. For example, a 65-year-old
male retiring in 2009 whose wages had steadily risen to $40,000 per year would receive a monthly
Social Security check of about $1,400. If his wages had steadily risen to $100,000, he would receive a
monthly check of about $2,200. According to one study, a typical American received about 45% of his
or her preretirement wage from Social Security.3 In 2008, the Social Security Administration initiated
payments to almost 2.3 million retirees, bringing the total number of retirees in the system to 35
million, with an aggregate total annual payout of $450 billion.4
There were concerns about the continued viability of Social Security, however. Beginning in 2010,
the number of retirees was expected to increase sharply due to the aging of the 78 million baby
boomers—those Americans born between 1946 and 1964—thereby increasing the ratio of retirees to
wage earners (see Exhibit 3). While both the Social Security tax rate and the minimum retirement age at
which a person could obtain the maximum benefit had been raised over the years, the official view of
the Social Security Administration in April 2008 was that further adjustments of this sort were needed.5
3 C. Rampell and M. Saltmarsh, “A Reluctance to Retire Means Fewer Openings,” New York Times, September 2, 2009.
4 U.S. Social Security Administration, Office of Retirement and Disability Policy, 2009 Annual Statistical Supplement.
5 Social Security Administration, The Future of Social Security, April 2008.
2023 to Aug 2023.
Others noted that “Social Security, while not threatened with immediate insolvency, will probably
require a drastic overhaul if it is to remain viable beyond the 2030’s.”6
Company pensions, meanwhile, had already undergone a drastic overhaul. Historically,

company-provided pensions came in one of two forms: defined benefit plans and defined
contribution plans. A defined benefit plan, like Social Security, promised retirees a lifelong monthly
payment whose magnitude depended on the retiree’s earnings history. In a defined contribution
plan, in contrast, workers took a portion of their salary (with their employer sometimes matching all
or part of that amount) and acquired financial assets, such as stocks, bonds, and mutual funds. These
assets, together with their returns, were then given back to the workers upon retirement.
In 1980, 60% of the 36 million U.S. workers who had a pension plan were exclusively enrolled in a
defined benefit plan, 17% were exclusively enrolled in a defined contribution plan, and 23% were
enrolled in both. By 2003, these numbers had flipped, with 62% enrolled exclusively in a defined
contribution plan, 10% enrolled in a defined benefit plan, and 28% enrolled in both. Explanations for
this shift varied, but most experts pointed to the desire of employers to shift the risk of retirement
funding from the company to the employee.
Adding to the pressure on retirees was an uneven distribution of wealth. In 2005, the poorest 35%
of baby boomers owned no financial assets, while the wealthiest 5% owned more than 50% of all the
assets owned by the baby boom generation. And a detailed financial study noted that, in 2000, the
mean value of financial assets owned by an American household at the time of retirement was
$336,000, but that the median value was only $81,000.7 Similarly, the mean wealth of these households—
which added in the net present value of their Social Security benefits, any defined benefit plans, and
the equity in their homes—was $783,000, while the median wealth was $537,000.8
Managing Assets during Retirement

With the shift from defined benefit to defined contribution plans and the uncertainty surrounding
future Social Security payments, someone retiring in 2010 faced challenges that those who retired a
decade or two earlier did not. Chris Blunt captured this situation in the following way:
In the old days, you retired at age 65 from IBM or AT&T and you immediately began
collecting both a pension and a Social Security check. Whether you lived to 75 or to 105, your
checks kept coming. If you died, your spouse received the checks until he or she died. The two
checks may not have been large, but when combined, they typically were enough to live
comfortably on and, more importantly, they were guaranteed. Therefore, there wasn’t a whole
lot of financial planning that a retiree needed to do.
In 2009, however, you retire from most firms and you are handed a lump sum of money
that represents the value of your defined contribution plan. This pot of money, plus your
monthly Social Security checks, has to last until you and your spouse die. If you both die early,
you might have a lot of money to leave to your children. But, if you both live a long time, you
run the risk of outliving the assets in your defined contribution plan, leaving you only Social
Security to fall back on.
6 “A Paycheck for Life: Using Annuities to Create a Secure Retirement,” Wall Street Journal, November 14, 2007.
7 The mean is the arithmetic average, while the median is the middle number. Thus, total financial assets divided by total
number of retirees equals $336,000 (the mean). But half of all retirees have more than $81,000 (the median) in total assets and
half have less.
8 J. Poterba, J. Rauh, S. Venti, and D. Wise, “Defined Contribution Plans, Defined Benefit Plans, and the Accumulation of
Retirement Wealth,” Journal of Public Economics, 91 (November 2007): 2062–2086.
2023 to Aug 2023.
The idea of “living too long” was not lost on retirees, with more than 90% reporting being either
very concerned or somewhat concerned about outliving their retirement assets. And this was at a
time when people were living longer than ever, with the life expectancy for a 65-year-old male being
83 years and for a 65-year-old female being closer to 85 years (see Table A).
Table A The Probability of Survival for Someone Reaching Age 65
At Least One
To Age Single Female Single Male Member of a Couple
70 94% 92% 99%
75 84 80 97
80 71 63 89
85 53 41 72
90 32 20 45
95 13 6 18
Source: Adapted from Society of Actuaries, RP-2000 Table.
Facing these prospects, many retirees questioned how much they could afford to spend. One
influential “rule of thumb” suggested that retirees could safely withdraw 4% of their current assets
each year.9 This recommendation was supported by Monte Carlo simulations. Using assumptions
that corresponded to historical yields, these simulations concluded that for a retirement portfolio that
was 50% stocks and 50% bonds, an inflation-adjusted withdrawal rate of 4% gave retirees a 95%
chance that their assets would last at least 30 years. By comparison, a 6% withdrawal rate gave them a
50% chance that their assets would last 30 years and an 8% rate gave them a 10% chance.10
Nevertheless, in a survey of people ages 41 to 92 conducted by New York Life in 2006, 29% of
respondents said that they could spend 10% or more each year, while 40% said they did not know
how much spending was safe. And even if retirees accepted that they could safely withdraw 4% per
year, they were still left with the question of where they should invest their funds. For instance, while
many financial advisors recommended that people should steadily increase the fraction of their
portfolio held in fixed-return assets as they aged, not everyone listened to this advice. In fact, one
study found that about a quarter of Americans ages 56 to 64 had more than 90% of their defined
contribution funds invested in stocks rather than bonds.11
At the other extreme, some retirees tried to automate their financial plans by investing in a
laddered portfolio of certificates of deposit (CDs). Offered by banks, CDs were savings-account-like
financial products that offered a fixed return if the deposit was left untouched for a specified period,
such as six months or five years. The idea was to have different CDs mature at different times and
then take out only the proceeds from those CDs that were maturing in a given period. However,
retirees who invested in CDs still faced the issue of what fraction of their maturing CDs to reinvest.
The Annuity Market

An additional family of financial instruments positioned as retirement products were annuities,
which entitled individuals to receive a specified payment per period for as long as they lived. By law,
9 Credit for rationalizing and recommending this rule of thumb is given to W. P. Bengen, “Determining Withdrawal Rates
Using Historical Data,” Journal of Financial Planning (October 1994): 14–24.
10 See, for example, K. Pechter, “A Smarter Form of SWiP,” Retirement Income Journal, 4 (June 10, 2009).
11 Rampell and Saltmarsh, 2009.
2023 to Aug 2023.
annuities could be offered or originated only by life insurance companies, although financial advisors
often offered these insurance-branded products as part of a diversified portfolio.
Immediate Annuities
The older and less complex type of annuity was the immediate annuity, first introduced in the late
1800s. In the purest form of this instrument, an individual would purchase an immediate annuity in
one lump sum at or near the time of retirement and then receive a monthly payment for the
remainder of his or her life. As previously mentioned, a 65-year-old male who purchased a $100,000
immediate annuity with no survivor benefits might receive $650 a month for as long as he lived. By
comparison, a 65-year-old woman might receive $600 per month, reflecting her longer expected life,
and a 65-year-old couple with a joint immediate annuity might receive $550 per month.
For some customers, immediate annuities had several appealing features. First, they often offered
more annual income than one might receive on other long-term, fixed-return financial products.
In the summer of 2009, for example, a five-year certificate of deposit (CD) was paying about 3% and a
30-year treasury note was offering about 4.5%, while an immediate annuity with no survivor benefits
had an annual payout as high as 8%. Second, so long as the insurance company stayed solvent,
monthly payments were guaranteed for the life of the individual.12
But for other customers, immediate annuities had their drawbacks. In particular, a buyer of an
immediate annuity lost unrestricted access to his or her funds. Traditionally, once an immediate
annuity was purchased, it was irrevocable. Thus, some viewed the purchase of an immediate annuity
as a gamble—those who lived long beyond their life expectancy received far more money than they
put in, whereas those who died within a few years of buying the immediate annuity forfeited any
remaining assets to the insurance company.
Deferred Annuities
First introduced in the 1950s, deferred annuities differed from immediate annuities in that they
were designed primarily for asset accumulation. The buyer of a deferred annuity would place money
into it during his or her income-earning years—either in a lump sum or in periodic deposits—and
that money would be made available to the purchaser at some specified time, such as “upon turning
59½ years of age.” Typically, individuals could get access to their funds earlier by paying a surrender
charge. Deferred annuities varied greatly in their terms. One basic distinction was between deferred
fixed annuities, which were comparable to CDs and had specified returns, and deferred variable
annuities, which were comparable to mutual funds and had returns that depended on stock prices.
Importantly, the return on a deferred annuity was not taxed until funds were withdrawn. What
made these products annuities was that at the end of the accumulation period the investor had the
option of converting the accumulated assets into an immediate annuity. In reality, however, 95% of
deferred annuity holders chose to withdraw their funds instead of turning them into annuities.
By and large, insurance agents or investment advisors who sold deferred variable annuities
received higher commissions than sellers of either immediate annuities or deferred fixed annuities.
For instance, immediate and deferred fixed annuities typically provided the seller a one-time
commission of 3% to 4%. In contrast, commissions on deferred variable annuities tended to run
12 In almost all states, a state guaranty association insured annuities up to at least $100,000 and often up to $250,000.
2023 to Aug 2023.
between 5% and 7%,13 with the seller also receiving a trailing fee of 0.25 percent per year over the
period in which the deferred variable annuity was held.
Attitudes toward Annuities

Immediate and deferred annuities differed not only in their design but also in their standing with
financial experts.
The Experts on Immediate Annuities

Most economists were strong advocates of immediate annuities. Some went so far as to argue that
individuals should annuitize most or all of their assets at retirement, thereby allowing retirees to have
a steady stream of income over their remaining life. If retirees were worried about unexpected
medical costs, they could supplement an immediate annuity with medical insurance. If they wanted
to leave something to their heirs, they could buy life insurance or, perhaps, annuitize only the wealth
they intended to spend on themselves. Some thought these arguments so compelling that they
recommended that the government require people to annuitize at least a part of their assets.14
One reason for economists’ positive view of immediate annuities was captured by a Wall Street
Journal article that noted, “[Immediate annuities] are the only financial tool that can guarantee that
your savings will last as long as you live.”15 Also, those who fully annuitized their wealth at
retirement had no further portfolio decisions to make. And their decision of how much to spend in
any given month was straightforward, as they could presumably spend all or most of their annuity
income as they received it.
Others argued that an immediate annuity should be part, but not the whole, of one’s entire
retirement portfolio. In this view, an immediate annuity could cover an individual’s basic expenses,
allowing that individual to invest his or her remaining assets in other financial products. As noted in
the Chicago Tribune:
An immediate annuity may not just provide income, it may help portfolios grow more than
those without one. . . . Adding an immediate annuity to a retirement portfolio of stock and
bonds improved overall investment returns and lowered risk, a new study shows. . . . Creating
the income security of an annuity to take care of basic expenses allowed investors to take more
risk with their stocks, allowing equities to grow over time.16
While economists favored immediate annuities, some people were more negative. Responding to
her own question as to whether she would recommend an immediate annuity, best-selling financial
author Suze Orman replied:
In most cases, no because you are giving up all claim to your principal investment.
Purchasing an [immediate annuity] in a low-interest rate environment is something I would be
13 Figures for the deferred variable annuity are from the National Association of Variable Annuities and are quoted in Ellen
Hoffman, “Annuities: Don’t Believe the Hype,” BusinessWeek, February 7, 2005.
14 See, for example, T. Davidoff, J.R. Brown and P.A. Diamond, “Annuities and Individual Welfare,” American Economic
Review, 95 (December 2005): 1573–1590.
15 Randy Myers, “Annuities 101: A Primer,” Wall Street Journal, November 14, 2007.
16 Janet Kidd Stewart, “Annuity Improves Retirement Portfolio, Study Finds,” Chicago Tribune, April 22, 2007.
2023 to Aug 2023.
especially wary of. . . . Unless you can lock in interest rates that are extremely high . . . I would
never annuitize. If you need income, just take monthly withdrawals.17
The Experts on Deferred Annuities

In contrast to immediate annuities, deferred annuities—especially deferred variable annuities—
garnered negative comments from most experts. Some experts spoke against them forcefully, with
Newsweek’s financial journalist Jane Bryant Quinn saying, “You rarely find me so deeply angry at a
common investment product that I dream of blowing it to smithereens.”18 And Ellen Hoffman of
Newsweek quoted a financial planner who said that variable annuities “are tax-inefficient, difficult if
not impossible to understand, and have high costs.” She continued:
Sure, potential buyers can ignore the sales fluff and dig into the fine print to figure out if an
annuity is right for them. But that can be a real slog: The prospectus for MetLife’s Preference
Plus Select Variable Annuity runs over 500 pages, so you know why most buyers wind up
relying on a sales spiel.19
While no one debated that particular variable annuities could be useful to particular individuals,
commentators complained that they were often sold too aggressively and ended up being held by
people who would have been better off with alternate assets. The high surrender charges of some
variable annuities drew particular ire, especially when customers claimed not to have understood
that they might be subject to these charges. Capturing the feeling held by many, one advisor said
“Out of 100 [deferred] annuity contracts, fewer than a dozen work well.”20
In some cases, the real losers from deferred variable annuities turned out to be the insurance
companies issuing them. Between 2002 and 2007, many variable annuities were sold with
“guaranteed minimum withdrawal benefits” that entitled holders to receive a minimum yearly
payment until their death, even if the market fell. With the massive drop in the stock prices in 2008,
many issuing firms found themselves overexposed, leading credit rating agencies to downgrade
several insurers in the period that followed.
The Market for Immediate Annuities

In spite of expert opinion, the U.S. market for immediate annuities paled in comparison to that for
deferred annuities (see Exhibits 4 and 5). In particular, whereas the market for immediate annuities
was about $8 billion in 2008, the market for deferred annuities was more than $250 billion. New York
Life’s Ted Mathas and Chris Blunt had heard plenty of reasons why immediate annuities were not
more popular. Most of those reasons hinged on either a lack of interest among consumers or a dislike
among financial advisors.
The Consumer
Those who viewed the end consumer as the reason for the small market in immediate annuities
made several points. First, they noted that many retirees just keep doing what they did prior to
retirement. As Mathas commented:
17 Suze Orman, The Road to Wealth, rev. ed. (New York: Penguin, 2008), pp. 515–516.
18 Jane Bryant Quinn, “One Faulty Investment,” Newsweek, August 30, 2004.
19 Hoffman, 2005.
20 Certified financial planner Mark Cortazzo, as quoted in Kimberly Lankford, “The Great Annuity Rip-Off,” Kiplinger’s
Personal Finance Magazine, January 2007.
2023 to Aug 2023.
Of the 65-year-olds who retire with any meaningful assets, maybe half seek out professional
financial advice. The other half just muddle through. They talk to friends, they read the
financial section of the paper, but for the most part they just keep doing exactly what they did
before they retired and hope for the best. For instance, in any given year, there are $400 billion
in CD rollovers, half of which are going to retirees. They are keeping their money in certificates
of deposit, or savings accounts, or stocks and bonds until they need it. Most of these people
have never even heard of an immediate annuity. And if they have, they confuse it with a
variable annuity, which brings a lot of negative baggage.
According to Blunt, other retirees maintained an investment mind-set. As a result, they were
concerned with rate of return, origination fees, management fees, and access to their funds:
For years, consumers have been instructed to minimize transaction fees through low-cost,
highly diversified index funds and to think about a long-run market return of 8% to 10%.
When they get to retirement, they are faced with an immediate annuity that has a 3% to 4% up-
front fee and a rate of return that might be 6% or 7%. They are assessing these products from
an investment mind-set when they should be assessing these products from an insurance or
risk management mind-set. Getting retirees to switch to a risk management mind-set is one of
our biggest hurdles.
Then there was the sticker shock associated with immediate annuities, as noted by Blunt:
The average immediate annuity is for $100,000. For the typical retiree, this represents a
significant chunk of his or her assets. Then you find out, for all practical purposes, you lose
direct access to the funds. Unless you are very confident, this is a huge step.
Finally, there was the concern of consumers about whether they would live long enough to make
the purchase pay off. After extolling the virtues of an immediate annuity, one investment article
closed by saying, “All told, it’s a good deal, provided you live long enough to make it pay off.”
The Agent/Advisor
Others placed the blame for the small market in immediate annuities on insurance agents and
financial advisors—whether they were in-house insurance agents at places like New York Life or
Mass Mutual or financial advisors at places like Merrill Lynch or Morgan Stanley Smith Barney.
These concerns had two flavors. The first was a belief among advisors that immediate annuities made
for bad retirement products. When asked to rate their preferences for different financial products as
part of a client’s retirement portfolio, agents at one firm did not rank immediate annuities very highly
(see Table B).
Table B Financial Advisors’ Preference for Clients’ Retirement Portfolios (as % of advisors)
Very Strong or Weak or Very Weak
Product Strong Preference Neutral Preference
Mutual funds 85% 11% 4%
Common stocks 84 11 5
Bonds 85 10 5
Real estate/REITS 57 32 11
Corporate bond funds 47 26 17
Deferred variable annuities 45 25 30
Immediate annuities 9 27 64
Source: Adapted from Morgan Stanley Research, Annuity Survey, March 2, 2007.
2023 to Aug 2023.
Many of these same advisors looked to other strategies to manage the risks of retirement. When
asked what recommendations they made to clients to manage the various risks of retirement, the
overwhelming response was a conservative withdrawal schedule (see Table C).
Even when the analysis focused on insurance and annuity agents, as opposed to financial
advisors, there appeared to be a host of reasons why the agents were reluctant to recommend
immediate annuities (see Table D).
Table C Financial Advisors’ Advice for Managing the Risks of Retirement (as % of advisors)
Agree or No Disagree or
Recommendation Strongly Agree Opinion Strongly Disagree
Conservative withdrawal schedules 95% 3% 2%
Delay retirement to build assets 74 11 15
Purchase annuities to guarantee lifetime payouts 45 15 40
Conservative investment allocation 38 5 57
Source: Adapted from Morgan Stanley Research, Annuity Survey, March 2, 2007.
Table D Reasons Insurance/Annuity Agents Did Not Recommend IAs (as % of agents)
Reason A Reason Most Important Reason

Lack of liquidity features 56% 21%
Not a good value for the money 46 21
Lack of inflation protection 42 18
I have limited knowledge of immediate annuities 35 15
Too complex for my clients to understand 21 4
Commissions are too low 14 4
Trailing compensation is not available 13 4
Source: Adapted from LIMRA, “Immediate Annuities: What Your Reps Really Think.”
Another source of opposition to immediate annuities among agents and advisors was
compensation. By not recommending immediate annuities, advisors could keep their clients in
tradable or revocable financial instruments. They could then collect a variety of fees over time instead
of receiving the one-time commission on an immediate annuity.
New York Life’s Efforts in Immediate Annuities

In 2002, Ted Mathas was New York Life’s senior vice president in charge of annuities. There he
faced a weakening stock market and an increasingly competitive market for deferred variable
annuities. Fearing a price war, in the form of overly aggressive guarantees of returns, he decided to
stop selling deferred variable annuities. Instead, on the grounds that “we are good at managing
longevity risk and fixed income assets” and not “predicting the stock market,” he decided to focus
NYL’s efforts on selling immediate annuities. One of his motivations for doing this was that it
“leveraged our understanding of mortality.” More important, he thought that the trends in
population and retirement implied that “people really needed” immediate annuities.
10
2023 to Aug 2023.
Consumer Research
When Mathas first suggested to New York Life’s agents that they offer immediate annuities, most
told him that consumers “were just not interested.” And some research seemed to back this up. In
one large survey, Americans were asked whether they would be willing to give up half of the amount
of their monthly Social Security benefits for a lump sum that was “actuarially fair” (so that it had the
same expected net present value). Nearly 60% of respondents preferred the lump sum over the
annuity-like stream of Social Security checks.21
Interestingly, this preference for a lump sum payment over lifetime payments did not appear to be
caused by a consumer’s inability to predict his or her life span. In fact, surveys suggested that when
asked to rate the likelihood they would reach a particular age, say 85, people were overly optimistic
and typically reported a probability that was higher than that computed by actuaries.22
With these issues in mind, Mathas decided to find out what consumers really thought by
conducting focus groups. He reported:
The first thing we learned was that people did not even know that immediate annuities
existed. The second thing was that people were interested in immediate annuities once we
talked about them. This told me that this was a product that was not purchased, it needed to be
sold. The problem was that no one was selling them.
New York Life’s Guaranteed Lifetime Income

The results from the focus groups he conducted led Mathas to change two things—the scope of
New York Life’s immediate annuity product and the way in which that product was sold. In 2005,
NYL re-branded its immediate annuity products as Guaranteed Lifetime Income (GLI) products,
adding features that Mathas believed would make the products more palatable to the average
consumer.
The simplest GLI retained the properties of a traditional immediate annuity. A retiree gave a large
sum of money to NYL, and NYL made a fixed payment for as long as the annuitant (in the case of
single-life annuity) or the annuitants (in the case of joint annuity) lived. Upon the death of the
annuitant(s), NYL terminated payments and retained any remaining funds. In practice, about 10% of
NYL’s immediate annuity customers bought a GLI of this type.
The remaining GLI customers bought an annuity with features that were more generous to the
annuitant’s heirs (in the case where the annuitant died early) or to the annuitant (for those who
needed greater access to their funds). These features included the following:
• Period certain option. This option guaranteed annuity payments for a specified number
of years (e.g., 5 years, 10 years, 30 years) to either the annuitant or the annuitant’s
heirs. If the annuitant lived longer than the specified period, annuity payments
continued as they would in a standard immediate annuity (see Exhibit 6). About 60%
of GLI customers chose this option.
21 Jeffrey R. Brown, “Rational and Behavioral Perspectives on the Role of Annuities in Retirement Planning,” in Overcoming the
Saving Slump (Chicago: University of Chicago Press, 2009).
22 Michael D. Hurd and Kathleen McGarry, “Evaluation of the Subjective Probabilities of Survival in the Health and
Retirement Study,” Journal of Human Resources, 30 (1995): S268–S292.
11
2023 to Aug 2023.
• Cash back. This option committed NYL to pay either the annuitant or the annuitant’s
heirs the full dollar amount that the annuitant had initially invested in the policy. For
instance, if a retiree had purchased a $100,000 immediate annuity, had received
$45,000 in monthly payments, and then had died, the heirs would receive a check for
$55,000. About 30% of customers opted for this option.
NYL also introduced several options that were seldom purchased but that were frequently
discussed between agents and potential customers. Among these were the following:
• Inflation protection. This option allowed monthly payments to grow at a constant rate,
such as 3% per year, that was specified by the customer.
• Income enhancement. This option allowed for a one-time increase in payouts, at the
five-year anniversary of the policy, if the benchmark interest rate rose more than two
percentage points from the time the policy was originated.
In addition, all policies allowed annuitants to receive their next six monthly payments all at once,
though this right could be exercised only twice during the life of the policy. Finally, at certain
anniversary dates or in response to a nonmedical emergency, most policies allowed annuitants to
receive an immediate payout of 30% of the present value of remaining payments, where this present
value was computed using the life expectancy at the time that the policy was purchased. Remaining
payments would then be reduced by 30%.
Selling through NYL Agents

Customers could learn about the features of GLI products from brochures and the Internet, both
of which directed them to obtain more specific advice from a New York Life agent. With 11,500
agents, NYL had the largest direct sales force in the insurance industry. To prepare them to sell
immediate annuities, Mathas instituted a four-day, off-site intensive training course. As of 2009, 40%
of agents had been through this course. NYL also furnished each agent with a list of customers to
whom they had previously sold insurance and who might now be ready to buy an immediate
annuity. Mathas believed that if these prospects were approached properly, around 25% would buy a
GLI product.
The selling of GLI products also required the development of new sales materials. A relatively
simple selling tool was a two-page brochure that explained, via a hypothetical example, how an
immediate annuity would fit into a person’s retirement plans (see Exhibits 7 and 8).
Finally, an NYL agent could use a two-step financial planning tool to determine how much of a
client’s wealth should be annuitized. In step 1, retirees were asked to tally their expected monthly
expenses for basic needs—such as food, clothing, and shelter. They were also asked to tally their
expected guaranteed monthly income—from Social Security and any defined benefit plan they might
have. If their basic expenses were larger than their income, the planning tool recommended that the
retiree purchase an immediate annuity to cover the difference. In step 2, retirees were given advice on
the fraction of their remaining financial wealth that they should annuitize.
As for results within the NYL agent channel, Chris Blunt estimated that in the 18 months since the
start of 2008, almost 4,000 of NYL’s 11,500 agents had sold at least one immediate annuity and more
than 1,500 had sold three or more immediate annuities.
12
2023 to Aug 2023.
Selling through Banks

In addition to increasing the attention for immediate annuities among its own agents, NYL made
use of the distribution agreements it had with many banks. The largest of these banks were JPMorgan
Chase, Wells Fargo, PNC, and Bank of America. Prior to 2002, banks sold very few immediate
annuities. However, at NYL’s urging, the 50,000 representatives at these banks sought to convert
retirees from certificates of deposit that offered lower returns to immediate annuities that offered
higher returns. While these banks typically carried annuities from other insurers, NYL’s efforts
resulted in more than a 50% market share in this channel.
Selling through AARP

Finally, through a partnership with AARP that started in 2007, NYL sent co-branded direct mail
advertisements to AARP members that described the benefits of its GLI products and provided a
number to call. In turn, NYL received phone calls from interested AARP members, ultimately selling
them about $140 million in immediate annuities in 2008.
Across these channels, NYL’s efforts with GLI products led to spectacular growth, with its sales of
immediate annuities going from $120 million in 2002 to $1.4 billion in 2008 to a projected $1.8 billion
in 2009. About 45% of these sales were through NYL agents, 45% were through banks and 10% were
through AARP, with the typical GLI worth about $100,000.
Growing the GLI Business

Having built New York Life’s immediate annuity business to almost $2 billion, Ted Mathas and
Chris Blunt now wanted to expand the market by going after the enormous pool of retiree funds
invested through investment advisors at places such as Morgan Stanley Smith Barney and Merrill
Lynch. Traditionally, these institutions offered investment advice and financial planning services to
individuals with high levels of net worth (i.e., those with investable assets in excess of $1 million).
More recently, however, they had made a push into advising “mass-affluent” clients, whose
investable assets exceeded only $100,000. Blunt felt that NYL was well positioned to make its case to
these advisors, arguing that immediate annuities were an “asset class” that belonged in most retirees’
portfolios.
Two things were required, however. First, NYL needed to negotiate arrangements with
investment advisors at places like Merrill Lynch and Morgan Stanley. Second, it needed to help these
financial advisors explain the usefulness of immediate annuities to their customers. As Blunt saw it:
A key to the success of this venture is to adapt our product to the business model of
financial advisors. In that world, people are used to measuring their success and to basing their
compensation on the assets that they have under management. We thus want them to see
annuities as an asset class that is like any other asset class in their managed portfolio.
Toward this end, Blunt proposed that advisor compensation for immediate annuities change from
a moderately sized up-front commission with no ongoing fees to no up-front commission with an
annual fee based on the expected present value of the remaining benefits. This valuation could be
used both to let customers track the value of their immediate annuities and to compensate
broker/agents for the value of annuities that they were currently responsible for. In the process, for
the broker/agent, the immediate annuity would look and feel more like assets under management
than a one-time transaction.
13
2023 to Aug 2023.
Not everyone in the company was sure this effort would succeed. For instance, some senior
executives wondered whether a financial advisor would ever feel comfortable proposing to clients
that they hand over funds to an insurance company in perpetuity. Rather, they argued that NYL
should focus on individuals during their working years. MetLife had recently teamed with Barclays
in such an effort (see Exhibit 9). The MetLife/Barclays product would act like an investment fund in
a defined contribution plan. This fund would be a blend of stocks and a deferred fixed annuity, with
the fraction of the annuity rising over time until it equaled 40% of the fund when the worker reached
the age of 62. As with any defined distribution plan, an employee would not be forced to annuitize at
retirement. But if a retiree did annuitize, his or her assets in the deferred annuity would be rolled into
an immediate annuity.
And still other executives argued that NYL should focus more on its own agents. With only 4,000
of NYL’s agents having sold an annuity in the past 18 months, they reasoned, there was room for
growth without trying to convert financial advisors from the likes of Merrill Lynch.
As Mathas contemplated how best to proceed, he asked himself both how large the overall market
for immediate annuities could become and how large a share of this market could be served by NYL.
Given the benefit that these annuities provided to their purchasers, he felt that sales in the immediate
annuity market could grow to $100 billion a year, with NYL retaining a 20% share of that market. He
noted:
At that level, this is not an overwhelming business opportunity, but it is a very good one.
As a mutual company, we are not all about the bottom line. My goal is to provide a service to
society and to make sure that the company is stronger every day. Even if we grow our
immediate annuity business to only $5 billion a year, the lives of many retirees will be greatly
improved.
14
2023 to Aug 2023.
Exhibit 1 Estimated Sales of Immediate Annuities in the U.S. ($ millions)
2002 2008
Company Sales Company Sales

Genworth Financial $ 720 New York Life $1,400
Fidelity Investments 385 Genworth Financial 700
Allstate Financial 335 Thrivant Financial 400
Fidelity & Guarantee 250 Principal Life 400
AIG 250 Allianz Life 400
Allianz Life 190 Protective Life 315
ING 140 Hartford Life 315
AEGON USA 140 AIG 315
New York Life 120 Minnesota Life 315
Standard Life of Indiana 100 MetLife 240
Other 2,170 Other 3,100
Total $ 4,800 Total $ 7,900
Source: Adapted from LIMRA International, Retirement Income Reference Book 2009.
Exhibit 2 Financial Highlights for New York Life ($ millions)
2003 2004 2005 2006 2007 2008

Operating revenue $ 9,645 $ 10,397 $ 11,064 $ 12,304 $ 12,992 $ 14,009
Operating earnings 879 1,020 934 1,093 1,283 1,278
Financial reserves 10,810 11,838 12,853 13,859 14,680 12,826
Assets under management 202,131 214,949 225,223 264,910 280,046 249,119
Value of life insurance policies 556,049 616,101 651,614 702,320 750,918 781,181
Source: New York Life.
15
2023 to Aug 2023.
Exhibit 3 Ratio of the U.S. Population Ages 65 and Over to Population Ages 20 to 64
Population (in millions)

Ages 65 and
Year Ages 20 to 64 Older Ratio
1950 92.8 12.8 0.138
1960 99.8 17.3 0.173
1970 113.0 20.1 0.185
1980 134.1 26.2 0.195
1990 153.3 32.0 0.209
2000 170.1 35.5 0.209
2010 190.0 40.5 0.213
2020 200.0 54.3 0.271
2030 204.7 70.8 0.346
2040 215.6 78.0 0.362
2050 227.2 81.6 0.359
Note: Figures after 2000 are projections by the Social Security Administration.
Source: Adapted from Social Security Administration, 2008.
Exhibit 4 Sales of Deferred Annuity Products in the U.S. ($ billions)
2007 2008
Deferred variable $ 184.0 $ 155.6
Deferred fixed 66.3 101.4
Total deferred $ 250.3 $ 257.0
Source: Adapted from LIMRA International, U.S. Individual Annuities.
16
2023 to Aug 2023.
Exhibit 5 Top 20 Sellers of Deferred Annuity Products in the U.S. in 2008 ($ billions)
Deferred Variable Annuities Deferred Fixed Annuities

Company Sales Company Sales
TIAA-CREF $ 14.4 AIG $ 11.0
MetLife 13.9 New York Life 9.1
ING 13.8 Aviva 7.8
AXA Equitable 13.4 MetLife 6.0
Lincoln Financial Group 11.1 AEGON USA 5.8
Prudential Annuities 10.2 Allianz Life 5.2
John Hancock 9.6 Jackson National Life 4.1
AIG 8.2 Allstate Financial 3.7
Hartford Life 7.9 Principal Life 3.6
Pacific Life 7.8 Hartford Life 2.8
Source: Adapted from LIMRA International, U.S. Individual Annuities.
Exhibit 6 A Typical Payout Quote for a $100,000 New York Life Immediate Annuity
Monthly Payout
Joint:
Single: Single: 65-Year-Old Male and
Type of Immediate Annuity 65-Year-Old Male 65-Year-Old Female Female
Life only $ 613.46 $ 563.92 $ 517.54
Life with 5-year period certain 606.65 561.86 507.26
Life with cash back 561.89 532.81 500.83
Notes: 1. Payouts reflect actual New York Life rates in October 2009.
2. One could also be interested in the expected present value of these payouts. To do this, the payment that an
individual would receive at a particular age, say 75, would have to be multiplied by the probability that this
individual will reach 75 and would have to be discounted by the interest rate that is relevant for a payment that
accrues in 10 years. Using a mortality table for annuitants developed by the Society of Actuaries and the discount
rates implied by the yields on U.S. Treasury obligations of different maturities, the case authors estimated that the
payouts of life-only annuities for 65-year-olds had an expected present value of about 87 cents per dollar of premium
in the case of men and about 88 cents per dollar of premium in the case of women. These estimates were quite rough.
17
2023 to Aug 2023.
-18-
510-040
A New York Life Sales Brochure Comparing Immediate Annuities to Certificates of Deposit (Page 1)
Exhibit 7
2023 to Aug 2023.
-19-
510-040
A New York Life Sales Brochure Comparing Immediate Annuities to Certificates of Deposit (Page 2)
Exhibit 7 (continued)
New York Life.

Source:
2023 to Aug 2023.
-20-
510-040
A New York Life Sales Brochure Encouraging Retirees to Use Immediate Annuities to Cover Basic Expenses (Page 1)
Exhibit 8
2023 to Aug 2023.
-21-
510-040
A New York Life Sales Brochure Encouraging Retirees to Use Immediate Annuities to Cover Basic Expenses (Page 2)
Exhibit 8 (continued)
2023 to Aug 2023.
Exhibit 9 Excerpts from FinancialWeek.Com Article, July 3, 2008
Barclays/MetLife Team-up Kicks Off Scramble to Add Annuity

Component to Target-date Funds
By Jenna Gottlieb
Embedding annuities into target-date funds might be the “A lot of target-date funds manage volatility in
key to offering annuities as an investment option in 401(k) retirement by becoming more conservative. One of the
plans. advantages [of that is] you can maintain a target-date
structure and get protection from the annuity component,”
Despite mounting interest in retirement income
Mr. Conley said.
products, 401(k) plan executives have been slow to offer
annuities as a stand-alone option because of their Patricia Harris, assistant vice president at Hartford
complexity and price. MetLife became the first to have its Financial, said: “We’ve done our research on how
annuity product included in target-date funds when [annuities in target-date funds] would work, and we will
executives inked a deal with Barclays Global Investors. start discussions with providers shortly.” She declined to
name any firms. Hartford offers a fixed-annuity option to
In March, Barclays selected MetLife to provide the
401(k) plans.
annuity portion of its SponsorMatch program.
SponsorMatch combines a target-date fund … managed by “It does make a lot of sense to offer guaranteed income
BGI and a deferred fixed annuity element provided by as a component of a target-date fund,” Ms. Harris said.
MetLife. SponsorMatch seeks to control exposure to “There would be a fixed amount of income and it would
market risk over time by increasing the funding to the give participants the ability to guarantee a certain amount
annuity payout as the participant ages. of money at retirement. It is a very viable route to go, and
target-date funds are already accepted with plans.”
Jody Strakosch, national director of institutional income
annuities for MetLife, said … that income products are “a These options are likely going to be offered through
very hot topic. It’s the record keepers, the money investment-only shops because they are easier to integrate,
managers; anyone involved is trying to crack the code. One she said. The process becomes more tedious when retail
way is to include guaranteed income into a target-date mutual funds are involved, which many bundled providers
fund.” … still offer to 401(k) plans. …
Other annuity providers, including Genworth Financial While annuity products are on the radar for many plans,
and Hartford Financial Services, are trying to figure out the take-up has been slow.
how to get in on the action.
As MetLife’s Ms. Strakosch explained, plan executives
Fred Conley, president of the institutional group at and others in the retirement industry first had to accept the
Genworth, said executives there are researching how to “major shift in the whole conversation from accumulating
place its annuity investment option within a target-date (assets) to guaranteed income. It’s been slow going, but
fund. ‘We’re still early in the guaranteed income phase,” we’re nearing the tipping point.”
Mr. Conley said. “There will be a target-date component.
“The market evolves in layers,” Mr. Conley said,
We, in our research and product group, are looking at how
agreeing the move toward annuities has been slow.
this could work with a target-date fund. There is an
approach where it could be built into the glide path of the
target-date funds.”
Source: FinancialWeek.com, accessed November 2, 2009.
22
2023 to Aug 2023.

New York Life Immediate Annuitites

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9-510-040

REV: MARCH 30, 2011

In 2002, immed diate annuitiees were a som

Noow, NYL’s ex xecutive vice--president Chhris Blunt, wh

Professoors Julio J. Rotembeerg and John T. Go

Copyrigght © 2009, 2010, 20

New York Life

Selling Life Insurance

2 New York Life, 2008 Annual Report, p. 9.

The Changing Retirement Picture

Company pensions, meanwhile, had already undergone a drastic overhaul. Historically,

Managing Assets during Retirement

Table A The Probability of Survival for Someone Reaching Age 65

Source: Adapted from Society of Actuaries, RP-2000 Table.

The Annuity Market

Attitudes toward Annuities

The Experts on Immediate Annuities

The Experts on Deferred Annuities

The Market for Immediate Annuities

Reason A Reason Most Important Reason

New York Life’s Efforts in Immediate Annuities

New York Life’s Guaranteed Lifetime Income

Selling through NYL Agents

Selling through Banks

Selling through AARP

Growing the GLI Business

Exhibit 1 Estimated Sales of Immediate Annuities in the U.S. ($ millions)

Company Sales Company Sales

Fidelity Investments 385 Genworth Financial 700

Allstate Financial 335 Thrivant Financial 400

Fidelity & Guarantee 250 Principal Life 400

AIG 250 Allianz Life 400

Allianz Life 190 Protective Life 315

ING 140 Hartford Life 315

AEGON USA 140 AIG 315

New York Life 120 Minnesota Life 315

Standard Life of Indiana 100 MetLife 240

Other 2,170 Other 3,100

Total $ 4,800 Total $ 7,900

Exhibit 2 Financial Highlights for New York Life ($ millions)

2003 2004 2005 2006 2007 2008

Source: New York Life.

Population (in millions)

Exhibit 4 Sales of Deferred Annuity Products in the U.S. ($ billions)

Deferred fixed 66.3 101.4

Total deferred $ 250.3 $ 257.0

Source: Adapted from LIMRA International, U.S. Individual Annuities.

Deferred Variable Annuities Deferred Fixed Annuities

Source: Adapted from LIMRA International, U.S. Individual Annuities.

Source: New York Life.

New York Life.

Source: New York Life.

Exhibit 9 Excerpts from FinancialWeek.Com Article, July 3, 2008

Barclays/MetLife Team-up Kicks Off Scramble to Add Annuity

Source: FinancialWeek.com, accessed November 2, 2009.

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