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Why an Annuity?

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Does anyone know why lotteries that offer the annuity option advertise that as the jackpot , with the cash value appearing secondary, rather than vice versa?

 

The reason seems fairly obvious to me, but I can't find a formal statement on it anywhere from any of the lotteries or lottery analysts/advisors/spokespersons. 

 

Here's the deal.  I'm in a debate over whether or not the practice of promoting the annuity value amount is a deceptive practice.  I argue that it isn't.  But what I can't answer, other than offering my own assessment, is why offer the annuity in the first place?  Or, if you are going to offer it, why not make that an option, but promote the cash value amount as primary?

 

Like I said, I think the answer is obvious, and it doesn't constitute deception, but it is a good question and I'm stumped for any other answer.  Any help?

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Does anyone know why lotteries that offer the annuity option advertise that as the jackpot , with the cash value appearing secondary, rather than vice versa?

 

The reason seems fairly obvious to me, but I can't find a formal statement on it anywhere from any of the lotteries or lottery analysts/advisors/spokespersons. 

 

Here's the deal.  I'm in a debate over whether or not the practice of promoting the annuity value amount is a deceptive practice.  I argue that it isn't.  But what I can't answer, other than offering my own assessment, is why offer the annuity in the first place?  Or, if you are going to offer it, why not make that an option, but promote the cash value amount as primary?

 

Like I said, I think the answer is obvious, and it doesn't constitute deception, but it is a good question and I'm stumped for any other answer.  Any help?

US lotteries at one time (before the 1990s) had rules where all online jackpot winners had to receive their prize through annuity payments. Even today, MA Megabucks, various scratch games and most "lifetime" prizes are still paid only as periodic payments. Elsewhere, US lotteries have been symphathetic to the majority of lottery players who would prefer getting paid in lump sum should they win.

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The officials assume everyone is well aware of the reality, but some lawyer found a loop hole.

 Just like the prices of different things we see all around us. Why do you always see $2.99, instead of $3.00? The answer is because they know how the human brain works. $2.99 looks alot better than $3.00

Just like they know that you know in reality it's 3 bucks, works just the same with before taxes with Jackpot amounts. It's all about enticement. Believe me, they found a loop hole. There are enough anti-gambling groups out there with ample amunition, and lawyers on their side who have the credentials to shut them down in a minute if they could.

Their problem in the past was how to get their interest on your winnings, if they gave you a lump sum. So they figured that they would take the amount that they would have made, if they just sent you annuities, as the interest, and keeping the principal.

It looks good when you see it at first because you're getting this big lump of cash, but you're really getting doubley taxed. One for the tax, and one for the net amount less the 25 year interest made on it. They get you no matter what.

They must be making more money on the annuities regardless of everything I've said above, because they are pushing it.....HMMMM

I wonder why.....A new twist on exploitation we're not aware of?

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I would have NO problem if Canada went to annuity jackpots. Provided of course that ALL their games would continue to have a cash option, as IMO they would.

SirMetro's avatar - center

I preface this comment with "this is merely my concept of the reason and I could be wrong".

First, I think the biggest reason the States offer an Annuity is to allow the State an oppurtunity to retain as much cash reserve as possible. One of the primary laws in Lottery and Gambling is that the entity offering the Game must have a reserve equal to an amount preset by the initial Constitution of that Game to insure that in the case of a large payout, there are adequate funds to cover the payout.

Second, the Annuity option provides a legit means of creating the "illusion" of a larger jackpot then it actually is. A good case in point is the current MegaMillion advertised value of $41 million. The approximated Cash value of this is roughly $23 million. Now here is the reality, of that, after State and Federal taxes (at least here in GA) that leaves between $14 to $15 million of real cash the winner would get to receive (assuming a single winner here in GA).

Now, you tell me, which would excite you more, winning $15 million or $41 million? Both amounts are true, it's just how you show the numbers. The advantage and disadvantage of an annuity is that the annual interest rate will control the end value. That is why the word "ESTIMATED" is always used.

All said and done, the question you should consider isn't the why. In my opinion, I think the question you should consider is, can you do better with the funds if you took the Cash value upfront instead of waiting over a course of 30 years for the State to pay you? I know I can do much better then that. Honestly, I could easily double or triple that value over 30 years (my goal is an increase of 20 fold, but first I need to win to start that concept). Whatever choice you may have to make, consider your future, not just short term goals when making your final decision.

Sir Metro

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I preface this comment with "this is merely my concept of the reason and I could be wrong".

First, I think the biggest reason the States offer an Annuity is to allow the State an oppurtunity to retain as much cash reserve as possible. One of the primary laws in Lottery and Gambling is that the entity offering the Game must have a reserve equal to an amount preset by the initial Constitution of that Game to insure that in the case of a large payout, there are adequate funds to cover the payout.

Second, the Annuity option provides a legit means of creating the "illusion" of a larger jackpot then it actually is. A good case in point is the current MegaMillion advertised value of $41 million. The approximated Cash value of this is roughly $23 million. Now here is the reality, of that, after State and Federal taxes (at least here in GA) that leaves between $14 to $15 million of real cash the winner would get to receive (assuming a single winner here in GA).

Now, you tell me, which would excite you more, winning $15 million or $41 million? Both amounts are true, it's just how you show the numbers. The advantage and disadvantage of an annuity is that the annual interest rate will control the end value. That is why the word "ESTIMATED" is always used.

All said and done, the question you should consider isn't the why. In my opinion, I think the question you should consider is, can you do better with the funds if you took the Cash value upfront instead of waiting over a course of 30 years for the State to pay you? I know I can do much better then that. Honestly, I could easily double or triple that value over 30 years (my goal is an increase of 20 fold, but first I need to win to start that concept). Whatever choice you may have to make, consider your future, not just short term goals when making your final decision.

Sir Metro

Thank you, Sir Metro. Always choose LUMP SUM, and never play games like GA's Lose for Life.

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The reason is simple. Big jackpots sell more tickets, and annuities allow lotteries to inflate jackpots higher than they really are. That means more tickets are sold for the same amount in the kitty.

dvdiva's avatar - 8ball

I far prefer annuity nonsense staying only in the US. If tickets weren't tax-free and all cash it would loose most of the appeal for me to play them. I'm sure players from the US represent a very small percentage of buyers but all cash make conversions very easy to make and represent truth in advertising for what is being won.

Dream's avatar - dragon1

I preface this comment with "this is merely my concept of the reason and I could be wrong".

First, I think the biggest reason the States offer an Annuity is to allow the State an oppurtunity to retain as much cash reserve as possible. One of the primary laws in Lottery and Gambling is that the entity offering the Game must have a reserve equal to an amount preset by the initial Constitution of that Game to insure that in the case of a large payout, there are adequate funds to cover the payout.

Second, the Annuity option provides a legit means of creating the "illusion" of a larger jackpot then it actually is. A good case in point is the current MegaMillion advertised value of $41 million. The approximated Cash value of this is roughly $23 million. Now here is the reality, of that, after State and Federal taxes (at least here in GA) that leaves between $14 to $15 million of real cash the winner would get to receive (assuming a single winner here in GA).

Now, you tell me, which would excite you more, winning $15 million or $41 million? Both amounts are true, it's just how you show the numbers. The advantage and disadvantage of an annuity is that the annual interest rate will control the end value. That is why the word "ESTIMATED" is always used.

All said and done, the question you should consider isn't the why. In my opinion, I think the question you should consider is, can you do better with the funds if you took the Cash value upfront instead of waiting over a course of 30 years for the State to pay you? I know I can do much better then that. Honestly, I could easily double or triple that value over 30 years (my goal is an increase of 20 fold, but first I need to win to start that concept). Whatever choice you may have to make, consider your future, not just short term goals when making your final decision.

Sir Metro

You could also invest yearly payments over thirty years to, adding to your investments each year.  $15.8 over 26 years at 4.0% is less then the current principal plus annual additions at 4.0%.

$15.8M over 26 years at 4.0% ~ $44M 

Annual payments of 1,088,007 over 26 years at 4.0~$53M

Of course there are other options

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Thanks for the replies.  I agree with the enticement answer.  That was my going-in guess.  I was just looking to see if there wasn't some other historical reason or explanation for why annuity jackpots are the default, promoted jackpot amounts.  It seemed obvious to me that lottery promoters like the psychological enticement of the bigger number, similar to the way knocking off a penny from the price of something to make it in the next dollar value down is an illusion of savings.  I was just hoping that there'd be some explicit admission of this somewhere, either by lotteries or lottery officials. 

 

As I explained, I'm asking "why" because it's pertinent to my argument.  "Cash Only" stated that originally, US Law required prize payment as an annuity.  I had not heard of that, and it would go a long way to explaining the start of the "tradition" of the annuity jackpot. 

 

My opponent argues that not explicitly stating that the big jackpot amount is an annuity is deceptive, and that lotteries should be compelled to either promote, as primary, the cash value option or at the very least, use the term Annuity Jackpot when citing the size of the jackpot. 

Anyway, thanks again.  Appreciate it.

Avatar

Thanks for the replies.  I agree with the enticement answer.  That was my going-in guess.  I was just looking to see if there wasn't some other historical reason or explanation for why annuity jackpots are the default, promoted jackpot amounts.  It seemed obvious to me that lottery promoters like the psychological enticement of the bigger number, similar to the way knocking off a penny from the price of something to make it in the next dollar value down is an illusion of savings.  I was just hoping that there'd be some explicit admission of this somewhere, either by lotteries or lottery officials. 

 

As I explained, I'm asking "why" because it's pertinent to my argument.  "Cash Only" stated that originally, US Law required prize payment as an annuity.  I had not heard of that, and it would go a long way to explaining the start of the "tradition" of the annuity jackpot. 

 

My opponent argues that not explicitly stating that the big jackpot amount is an annuity is deceptive, and that lotteries should be compelled to either promote, as primary, the cash value option or at the very least, use the term Annuity Jackpot when citing the size of the jackpot. 

Anyway, thanks again.  Appreciate it.

Actually, all the state lottery regulations required prizes to be paid through annuities. There was no federal law dictating annuities.

DoctorEw220's avatar - alien helmet.jpg

Does anyone know why lotteries that offer the annuity option advertise that as the jackpot , with the cash value appearing secondary, rather than vice versa?

 

The reason seems fairly obvious to me, but I can't find a formal statement on it anywhere from any of the lotteries or lottery analysts/advisors/spokespersons. 

 

Here's the deal.  I'm in a debate over whether or not the practice of promoting the annuity value amount is a deceptive practice.  I argue that it isn't.  But what I can't answer, other than offering my own assessment, is why offer the annuity in the first place?  Or, if you are going to offer it, why not make that an option, but promote the cash value amount as primary?

 

Like I said, I think the answer is obvious, and it doesn't constitute deception, but it is a good question and I'm stumped for any other answer.  Any help?

Alright,

 You may be new here, but here's a tip to make sure you don't get a bunch of useless posts on a thread:

 Don't get CASH Only started.

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lol

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Thanks for the replies.  I agree with the enticement answer.  That was my going-in guess.  I was just looking to see if there wasn't some other historical reason or explanation for why annuity jackpots are the default, promoted jackpot amounts.  It seemed obvious to me that lottery promoters like the psychological enticement of the bigger number, similar to the way knocking off a penny from the price of something to make it in the next dollar value down is an illusion of savings.  I was just hoping that there'd be some explicit admission of this somewhere, either by lotteries or lottery officials. 

 

As I explained, I'm asking "why" because it's pertinent to my argument.  "Cash Only" stated that originally, US Law required prize payment as an annuity.  I had not heard of that, and it would go a long way to explaining the start of the "tradition" of the annuity jackpot. 

 

My opponent argues that not explicitly stating that the big jackpot amount is an annuity is deceptive, and that lotteries should be compelled to either promote, as primary, the cash value option or at the very least, use the term Annuity Jackpot when citing the size of the jackpot. 

Anyway, thanks again.  Appreciate it.

Actually, all the state lottery regulations required prizes to be paid through annuities. There was no federal law dictating annuities.

My mistake.  I skewed what you originally said (probably seeing what I wanted to see). 

 

I thought you were stating that at some earlier point, state-run lotteries were required, by law, to issue jackpots as annuities.  But what you're saying (and correct me if I'm wrong) is that state-run lotteries governed themselves and required that prizes be paid through annuities. 

 

This wasn't law, right?  This was more a matter of convention selected by the lotteries preferencing annuities over lump sums. Which leads me back to the question of "why?" 

 

I really cannot think of any other explanation other than lotteries want to promote a larger-sounding future value amount than the present value amount.  I don't consider that deceptive since it's pretty common knowledge amongst players nowadays anyway, the lotteries make the fact open (even if they don't make it explicit when the jackpot amount is quoted), the lotteries also disclose the present value of the lottery, even if it is in smaller print; and players can now take the lump sum instead if they think they can do better than the annuity's interest rate.

 

But I've got to say that, at least in the earlier days, it does sound a bit deceptive to only offer an annuity prize and call it "the jackpot."  It's not lying if it's spelled out in the rules and regulations, but if it was before lotteries became so culturally ingrained and common knowledge that jackpot amounts were annuity values, then that's sketchy.  It does go to the intent of the lotteries and whether or not the annuity jackpot is designed to be more than just promotional sleight-of-hand. 

 

Is this a non-issue for you regulars?  Is there any undercurrent or grumbling about how the lotteries amplify the annuity value, keeping the cash value sort of in the background, even though the cash value is what the majority of winners take and the majority of players are really interested in?  Should lotteries switch, and make the cash value the primary prize with an annuity being the optional alternative? (I don't really think the annuity should be dispensed with since there are circumstances under which the annuity is the better deal for some.) 

RJOh's avatar - chipmunk

State lotteries jackpots started out as annuities. Cash options were offered later after some winners (especially the older ones) were selling their prizes for an amount of cash much less than their real value which was an issue.  Now that winners have a choice of taking the cash value of their prize from the get go, it's no longer an issue.  You seem to be arguing that now because the cash option is offered to the winners the jackpot should be advertised differently, would it be more honest to stop offering the cash options again?

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