The latest round of Federal Reserve rate hikes could push annuities to unprecedented sales growth over the next few years, according to Todd Giesing, assistant vice president and director of annuity research at LIMRA, the Windsor, Conn.-based market research concern.

Giesing’s forecasts are a continuation of current trends, but on steroids. For the past two quarters, annuity sales experienced record-breaking growth, as measured by LIMRA’s “U.S. Individual Annuity Sales Survey.” When the Fed raised interest rates by another 75 basis points this week—the sixth increase this year—and suggested more rate hikes to come, annuity sales got the shot in the arm they needed to keep soaring for the next couple of years.

“LIMRA anticipates a boost in annuity sales, as continued worries about equity market volatility and a possible recession have investors seeking safety,” explained Giesing in a press release.

The basic argument is that rising interest rates cause equity volatility. That, in turn, leads investors to seek safety. Annuities not only offer certainty in an unstable environment but also tend to pay out more than corresponding bonds. In fact, the higher the interest rates, the greater the annuity payout rates.

Giesing said that most Americans buy annuities either to protect their assets from market volatility or to create a guaranteed income stream in retirement, or both. “With protection being the key driver of sales, rising interest rates will continue to make annuities an attractive solution as Americans navigate challenging economic conditions,” he added.

But of course, not all annuities are alike.

Fixed annuities—sometimes called multi-year guaranteed annuities (MYGAs)—are most directly affected by interest rates. They return a predictable, guaranteed rate that’s correlated to prevailing interest rates.

Variable annuities (VAs), on the other hand, are linked to stock market performance via mutual-fund-like subaccounts. Even they can be positively affected by Fed rate hikes, however. If a subaccount’s value rises with the stock market, the percentage of those gains that’s credited to the annuity holder depends partly on prevailing interest rates. When rates are high, the crediting rates for VA holders increase accordingly.

The same is true for fixed-indexed annuities (FIAs), which credit annuity owners a portion of market index gains up to a predetermined cap. With these, there is also downside protection. If the index falls, annuity holders lose nothing.

“Bond yields play a significant role in the potential upside for a number of annuity products,” said David Blanchett, head of retirement research at PGIM, the investment management group of Prudential. The insurance companies that produce annuities tend to hold their assets in fixed-income instruments, and when they earn more, they offer their customers more. As interest rates rise, for instance, annuity providers keep raising the cap rates on fixed-index annuities. Lately, he added, they can’t seem to increase those caps fast enough. “As soon as they do, someone else beats it,” he said.

Giesing noted that LIMRA predicts FIAs will reach record sales levels this year and continue to improve all the way through 2025.

But gains in fixed-annuity sales come as variable annuity sales falter. In the first three quarters of 2022, VA sales fell 25% from the same period a year earlier. Even registered index-linked annuities (RILAs), which are variable annuities that cap growth in return for varying degrees of downside protection, have slumped. They enjoyed greater than 30% annual sales growth for three years running, but now LIMRA is predicting RILA sales will be flat at best for the year. The reason: Their upside is tied to the stock market.

Giesing acknowledged that higher interest rates also create stiffer competition for annuities. Nearly all new fixed-income investments will offer greater yields than before. “With short-term interest rates rising faster than longer-term rates, competitive alternatives such as bank CDs, brokerage CDs, and other options that offer more liquidity may become more attractive for individuals looking for safety,” he said.

But annuities can provide benefits that bonds don't, such as guaranteed income for life. Many also offer riders (for an extra fee), such as a death benefit or long-term-care insurance, that bonds, money market funds and CDs can’t.

“Financial advisors who maybe dismissed FIAs or other similar products in the past probably need to at least take the time to understand the product landscape today and re-evaluate the role some of these products can potentially play in a client portfolio,” said Blanchett.