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Annuities on track for a banner year as consumers flee from stock volatility and insurers offer more attractive rates,
LIMRA, an insurance industry conglomerate, forecasts annuity sales of $267 billion to $288 billion in 2022, eclipsing the record set in 2008 ($265 billion). Consumers pumped in $255 billion in annuities last year — the third-largest annual total, according to Limra.
There are many types of annuities. They typically serve one of two functions: providing income for life in retirement as an investment or as a quasi-pension plan.
Insurers guarantee buyers to hedge risks such as market volatility or risk of saving in old age.
Recently, consumers have increased spending on annuities across categories, according to industry experts and financial advisors, suggesting that buyers are investors protecting money in stocks and bonds, and those seeking steady retirement income. are less senior.
S&P 500 Index Down more than 13% this year as investors digest concerns About economic development and the war in Ukraine. Bloomberg US Aggregate bond index is down more than 9%. Bond prices are under pressure as the Federal Reserve raises its benchmark interest rate To control inflation. (Bond prices move inversely to interest rates.)
“It’s a fear trade,” Lee BakerA certified financial planner based in Atlanta and founder of Apex Financial Services, said of the high annuity sales.
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Amidst rising interest rates, insurance companies have been offering consumers better payouts and guarantees on all types of annuities, which increase profits for insurance companies.
Baker expects that some consumers are buying a sales pitch — insulation from market volatility — without fully understanding the product they are buying.
There are some tradeoffs, he said. Insurers typically charge a premium for their guarantees — which can make annuities costlier than investments like mutual funds. Consumers also generally cannot touch their money for many years without penalty, with few exceptions.
“There’s no free lunch,” Baker said.
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According to Limra, consumers purchased $16 billion of fixed-rate deferred annuities in the first quarter, up 45% from Q4 2021 and up 9% from the same period last year.
These work like a certificate of deposit issued by a bank. Insurers guarantee a rate of return over a fixed period, perhaps three or five years. At the end of the term, buyers can get their money back, roll it over into another annuity or convert their money into an income stream.
According to Todd Giesing, head of annuity research at LIMRA, the average buyer is in his or her early to mid-60s — nearing traditional retirement age — and looking to protect their money as they get out of work.
According to Limra, sales of indexed annuity and buffer annuity grew in the first quarter (21% and 5%, respectively) as compared to the same period last year.
Each hedges against a varying degree of downside risk. These annuities are linked to a market index such as the S&P 500; Insurers keep earnings on an upside when the market performs well, but a floor on losses if it tanks.
Atlanta-based CFP Ted Jenkin likens the yearbook to bowling with bumpers to avoid throwing a gutter ball.
“We don’t use them all the time,” said jenkin, Chief Executive and Co-Founder of Oxygen Financial. “We offer this to customers who are concerned about risk.”
Meanwhile, annuities for retirees seeking pension-like income have not received as much enthusiasm from consumers. Limra said immediate or deferred income annuities (which begin paying income now or in the future) captured $1.5 billion and $370 million, respectively, in the first quarter. These figures are flat and down 14%, respectively, from the first quarter of 2021.
However, Giesing expects enthusiasm to pick up if interest rates continue to rise, as expected.
Baker said risk-averse investors interested in a fixed-rate deferred, indexed or buffer annuity should typically allocate a portion of their bond portfolio to purchases as an option.
“Over the long term, I think the math favors a diversified portfolio of bonds, equities and real estate,” Baker said of annuities. “But for some people, they can’t stomach it.”
He said there are also exchange-traded funds that accomplish the same goal much cheaper.
Financial planners recommend comparing annuity quotes from different insurance companies. Consumers should also consult a firm such as S&P Global Ratings, AM Best Company, Fitch Ratings or Moody’s to ensure an insurer has a strong credit rating.