Annuity sales rise, buoyed by market fears and higher interest rates. What to know before you buy
Annuities are on track for a banner year as consumers flee stock volatility and insurers offer more attractive rates.
Limra, an insurance industry group, forecasts annuity sales of $267 billion to $288 billion in 2022, eclipsing the record ($265 billion) set in 2008.
Consumers pumped $255 billion into annuities last year — the third-highest annual total, according to Limra.
There are many types of annuities. They generally serve one of two functions: as an investment or as a quasi-pension plan offering income for life in retirement.
Insurers offer buyers guarantees that hedge risk like market volatility or the danger of outliving savings in old age.
Recently, consumers have ramped up spending on annuities in categories that suggest buyers are investors seeking to protect money from gyrations in stocks and bonds;
rather than seniors seeking steady retirement income, according to industry experts and financial advisors.
The S&P 500 is down more than 13% this year as investors digest concerns about anemic economic growth and the war in Ukraine.
The Bloomberg U.S. Aggregate bond index is down more than 9%. Bond prices have been pressured as the Federal Reserve raises its benchmark interest rate to tame inflation.
(Bond prices move opposite to interest rates.)
“It’s a fear trade,” Lee Baker, a certified financial planner based in Atlanta and founder of Apex Financial Services, said of the boost in annuity sales.
Insurers have also offered consumers better payouts and guarantees on all types of annuities amid rising interest rates, which increase profits for insurance companies.
Baker expects some consumers are buying the sales pitch — insulation from market volatility — without fully understanding the product they’re purchasing.
There are some trade-offs, he said. Insurers generally charge a premium for their guarantee, which may make an annuity more costly than investments like mutual funds.
Consumers also generally can’t touch their money for many years without penalty, with some exceptions.
“There’s no free lunch,” Baker said.
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‘Concerned with risk’
Consumers bought $16 billion of fixed-rate deferred annuities in the first quarter, up 45% from the previous quarter, and a 9% rise from the year-earlier period, according to Limra.
These annuities work like a certificate of deposit offered by a bank. Insurers guarantee a rate of return over a set period, maybe three or five years.
At the end of the term, buyers can get their money back, roll it into another annuity or convert their money into an income stream.
Average buyers are in their early to mid-60s — near traditional retirement age and looking to protect their money as they shift out of work, according to Todd Giesing, who heads annuity research at Limra.
Indexed annuity and buffer annuity sales were up in the first quarter (by 21% and 5%, respectively) year over year, according to Limra.
Each of these products hedge against downside risk to varying degrees. They are tied to a market index like the S&P 500; insurers cap earnings to the upside when the market does well but put a floor on losses if it tanks.
Ted Jenkin, an Atlanta-based CFP, likens the annuities to bowling with bumpers to avoid throwing a gutter ball.
“We don’t use them all of the time,” said Jenkin, chief executive and co-founder of oXYGen Financial. “We present it to clients who are concerned with risk.”
Meanwhile, annuities geared more for retirees seeking pension-like income haven’t garnered as much enthusiasm from consumers.
Immediate or deferred-income annuities (which start paying income now or years in the future) captured $1.5 billion and $370 million in the first quarter, respectively, Limra said.
Those figures are flat and down 14%, respectively, from the year-earlier period.
However, Giesing expects that enthusiasm to grow if interest rates continue to rise, as is expected.
Risk-averse investors interested in a fixed-rate deferred, indexed or buffer annuity should generally allocate a portion of their bond portfolio to the purchase as a substitute, Baker said.
“Long term, I think the math is in favor of a diversified portfolio of bonds, equities and real estate,” Baker said of annuities. “But for some people, they can’t stomach it.”
There are also exchange-traded funds that accomplish the same goal and can be a lot cheaper, he added.
Financial planners recommend comparing annuity quotes from different insurers. Consumers should also consult a firm like S&P Global Ratings, A.M. Best Company;
Fitch Ratings or Moody’s to ensure the insurer has a strong credit rating.