Annuities are on monitor for a banner 12 months as customers flee inventory volatility and insurers provide extra enticing charges.
Limra, an insurance coverage business group, forecasts annuity sales of $267 billion to $288 billion in 2022, eclipsing the document ($265 billion) set in 2008. Customers pumped $255 billion into annuities final 12 months — the third-highest annual whole, in accordance to Limra.
There are a lot of varieties of annuities. They often serve one in all two capabilities: as an funding or as a quasi-pension plan providing earnings for all times in retirement.
Insurers provide patrons ensures that hedge threat like market volatility or the hazard of outliving financial savings in previous age.
Not too long ago, customers have ramped up spending on annuities in classes that recommend patrons are buyers looking for to defend cash from gyrations in shares and bonds, and fewer so seniors looking for regular retirement earnings, in accordance to business consultants and monetary advisors.
The S&P 500 Index is down greater than 13% this 12 months as buyers digest considerations about financial progress and the struggle in Ukraine. The Bloomberg U.S. Combination bond index is down greater than 9%. Bond costs have been pressured because the Federal Reserve raises its benchmark rate of interest to tame inflation. (Bond costs transfer reverse to rates of interest.)
“It’s a fear trade,” Lee Baker, a licensed monetary planner primarily based in Atlanta and founding father of Apex Monetary Providers, stated of higher annuity sales.
Insurers have additionally supplied customers higher payouts and ensures on all varieties of annuities amid rising rates of interest, which increase earnings for insurance coverage firms.
Baker expects some customers are buying the sales pitch — insulation from market volatility — with out absolutely understanding the product they’re buying.
There are some tradeoffs, he stated. Insurers usually cost a premium for his or her assure — which can make an annuity costlier than investments like mutual funds. Customers additionally usually cannot contact their cash for a few years with out penalty, with some exceptions.
“There’s no free lunch,” Baker stated.
‘Involved with threat’
Customers purchased $16 billion of fixed-rate deferred annuities within the first quarter, up 45% from This fall 2021 and 9% from the identical time final 12 months, in accordance to Limra.
These work like a certificates of deposit supplied by a financial institution. Insurers assure a price of return over a set interval, possibly three or 5 years. On the finish of the time period, patrons can get their a reimbursement, roll it into one other annuity or convert their cash into an earnings stream.
Common patrons are of their early to mid-60s — close to conventional retirement age and looking out to defend their cash as they shift out of labor, in accordance to Todd Giesing, who heads annuity analysis at Limra.
Listed annuity and buffer annuity sales had been up within the first quarter (by 21% and 5%, respectively) relative to the identical time final 12 months, in accordance to Limra.
Every hedges in opposition to draw back threat to various levels. These annuities are tied to a market index just like the S&P 500; insurers cap earnings to the upside when the market does nicely however put a ground on losses if it tanks.
Ted Jenkin, an Atlanta-based CFP, likens the annuities to bowling with bumpers to keep away from throwing a gutter ball.
“We don’t use them all of the time,” stated 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% from Q1 2021, respectively.
However, Giesing expects that enthusiasm to grow if interest rates continue to rise, as is expected.
Bond substitute
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 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.
