With the backdrop of the Covid-19 pandemic, rising interest rates, high inflation and the looming war in Ukraine, 2021 annuity sales in the U.S. posted their highest numbers since the great recession of 2008. “There was significant pent-up demand for investment options that offered a balance of protection and growth,” says Todd Giesing, assistant vice president of SRI Annuity Research.
But is that wise? Does it make sense to purchase annuities in times of economic turmoil and uncertainty?
A Plethora Of Options
The answer is, it depends. “Annuities play a role in a number of different ways in a market like this,” says David Lau, CEO of DPL Financial Partners, a Louisville, Ky.-based platform for low-cost, commission-free insurance solutions. “The thing to always keep in mind, which so many people seem to forget, is that there are many kinds of annuities.”
Typically, annuities are thought of as a source of retirement income or perhaps an auxiliary pension in an era when traditional pensions are disappearing. That’s because they are the only instruments that can guarantee lifetime income no matter the market conditions or how long you live.
“Annuities are designed to provide lifetime income in retirement, [but] they are also designed to provide financial stability in challenging times over the long term,” says Andrew Melnyk, vice president of research and chief economist at the American Council of Life Insurers in Washington, D.C.
Individual Needs, Not Market Dynamics
Overall, though, experts insist that any annuity-buying decision should be determined by each individual’s situation, not by market dynamics. “Which specific type of annuity is appropriate for an individual depends on their circumstances, risk tolerance, preferences in terms of payout and timing, age, etc.,” says Melnyk.
Adds Lau: “You shouldn’t concern yourself with what’s going on in the market so much as whether you might benefit from an annuity. Otherwise, you’re market timing.”
Registered Index-Linked Annuities
Nevertheless, equity volatility and lackluster bond rates have no doubt fueled annuity sales. The biggest sales gainers lately are registered index-linked annuities, a relatively new type of variable annuity that’s structured to give its owners a percentage of market index gains while limiting the impact of losses. In 2021, sales of this product, also known as a RILA, were $38.7 billion, 61% higher than in 2020.
RILAs are touted as providing both protection and growth, but some observers are dubious. “For a consumer who fears loss and is seeking to mitigate uncertainty, [a RILA] is empowering and comforting,” says Dan Sudit, a partner at Crewe Advisors, a private wealth management concern in Salt Lake City. This, he says, is “emblematic of a consumer who wants to bake their cake and eat it, too, without ingesting any calories.”
The truth, notes Sudit, is that the insurance carrier can manipulate crediting rates, loss limits and other technical aspects that ensure the carrier’s profits at the clients’ expense. “The house always wins,” he says.
Fixed-Index Annuities
The next-best-selling category is fixed-indexed annuities, which bear similarities to registered index-linked annuities, except that the upside potential is less generous and the downside is locked at zero. Since you cannot lose money, fixed-index annuities are as safe as CDs or investment-grade bonds, though in an up market the fixed-index annuities usually pay a little better.
David Blanchett, head of retirement research at PGIM, the Newark, N.J.-based asset management arm of Prudential Financial, says fixed-index annuities, or FIAs, are the safest version of registered index-linked annuities. “You can’t lose money, but you’re probably not going to make much,” Blanchett says.
Last year, total fixed-index annuity sales rose 15%, to $63.7 billion, the highest annual sales growth for the product in three years. If market volatility continues, however, Blanchett speculates that fixed-index annuities may soon outsell registered index-linked annuities.