Amid inventory market gyrations, recession fears and loftier payouts, customers final 12 months pumped a record sum of cash into annuities, a kind of insurance coverage that gives a assured earnings stream.
Consumers funneled $310.6 billion into annuities in 2022, in accordance with estimates printed by Limra, an insurance coverage business commerce group.
That determine is a 17% improve over the prior record set in 2008, when customers bought $265 billion of annuities. That 12 months, the U.S. was in the throes of the Nice Recession and the inventory market finally bottomed out with a 57% loss.
Equally, 2022 noticed the S&P 500 Index submit its worst loss since 2008, ending the 12 months down 19.4%. The U.S. Federal Reserve raised interest rates aggressively to tamp out stubbornly excessive inflation, fueling anxieties that the central financial institution would inadvertently tip the nation into recession.
“In ugly times, people get concerned about safety,” stated Lee Baker, a licensed monetary planner and founding father of Apex Monetary Providers, primarily based in Atlanta, and a member of CNBC’s Advisor Council.
‘Distinctive’ confluence of things drove annuity sales
There are various forms of annuities. They typically fall into two classes: an funding or a quasi-pension plan providing a assured stage of earnings for all times in retirement.
All annuities are issued by insurance coverage firms, which hedge dangers like market volatility or the hazard of outliving savings in old age.
Annuities have also benefited from the Fed’s cycle of raising interest rates, which has translated to a better return on investment. Meanwhile, U.S. bonds — which typically act as a ballast when stocks fall — suffered their worst year on record in 2022, leaving few options for savers looking for relative safety and a decent return.
“This was a unique year,” Todd Giesing, assistant vice president of Limra Annuity Research, said of the factors that combined to drive record annuity sales.
Consumers were especially sanguine about fixed-rate deferred annuities last year. Total sales in that category — $112.1 billion — more than doubled those in 2021 and broke the prior annual record in 2002, when consumers bought $80.8 billion, according to Limra data.
Fixed-rate deferred 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.
Another category — indexed annuities — captured $79.4 billion, an 8% increase on its 2019 record, Limra said.
Indexed annuities hedge against downside risk. 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.
“Anything that’s protection-based and has some downside protection is doing very well,” Giesing told CNBC last fall.
Meanwhile, consumers have shied away from variable annuities, the performance of which is generally tied directly to the stock market. Annual sales of $61.7 billion were the lowest since 1995 for those annuities, Limra said.
While it’s unlikely that 2022’s confluence of factors — such as big stock and bond losses and rapidly rising interest rates — will persist in the near term, demographic trends including baby boomer retirements underpin long-term growth potential for annuity sales, Giesing said. The average buyer is around 63 years old, he said.
How to know if an annuity makes sense for you
Annuities might not make sense for everyone, according to financial advisors.
Advisors often recommend some lesser-used annuity types when building financial plans: a single-premium immediate annuity or a deferred-income annuity.
These are for retirees seeking a guaranteed, pension-like income each month for life. Payouts from immediate annuities start right away, while those from deferred-income annuities starts later, perhaps in a retiree’s 70s or 80s.
These payments, coupled with other guaranteed sources of income such as Social Security, help ensure a retiree has cash to cover necessities like a mortgage, utilities and food if they live longer than expected and their investments are tapped out or dwindling.
“Am I worried about the client running out of money? If yes, that’s when I think about an annuity,” Carolyn McClanahan, a CFP and founder of Life Planning Partners, based in Jacksonville, Florida, has told CNBC.
McClanahan, a member of CNBC’s Advisor Council, doesn’t use single-premium immediate annuities or deferred-income annuities with clients who have more than enough money to live comfortably in retirement.
Annuities become more of a preference for those somewhere in the middle: clients who are likely but not necessarily going to have enough money. For them, it’s more of an emotional calculus: Will having more guaranteed income offer peace of mind?
‘A lot of people don’t understand the limitations’
Of course, different categories of annuities come with trade-offs.
Single-premium immediate annuities and deferred-income annuities are relatively simple to understand compared with other categories, advisors said. The buyer hands over a lump sum to the insurer, which then guarantees a certain monthly payment to the buyer starting now (an immediate annuity) or later (a deferred-income annuity).
That’s because they don’t come with bells and whistles that cost buyers money.
“The fancier the annuity, the more the underlying fees are,” McClanahan said. “And a lot of people don’t understand the limitations. It’s important to know what you’re buying.”
For example, consumers can buy variable and indexed annuities with certain features — known as “guaranteed living benefits” — that give buyers the choice between a lifetime income stream or liquidity (i.e., some of their money back) if they need funds early or no longer want their investment. Those benefit features also generally come with higher costs, as well as restrictions and other fine print that might be difficult for consumers to understand, advisors said.
By contrast, however, consumers can’t get back their principal when they buy single-premium immediate annuities or deferred-income annuities. This is one likely reason consumers don’t buy them as readily, despite their income efficiency, Giesing said.
Single-premium immediate annuity sales were $9.1 billion in 2022, and consumers bought about $2.1 billion of deferred-income annuities, Limra said. For context, those figures are, respectively, about a 12th and a 53rd of fixed-rate deferred annuity sales.
Protection-focused annuities may make sense for someone five to 10 years away from retirement who can’t stomach investment volatility and is willing to pay a slightly higher cost for stability, Baker said.
However, their value proposition may not make sense for all investors at a time when they can now get a return over 4% on safe-haven assets such as shorter-term U.S. Treasury bonds (a 3-month, 1-year and 2-year, for example) if they hold those bonds to maturity, Baker said. However, those Treasury bonds don’t guarantee a certain income stream like annuities do.