Fees play a minimal role in a person’s decision to purchase an annuity, with the chief factor being the product's ability to generate income, according to a new LIMRA survey.
Annuity sales have been booming this year, fueled in part by the U.S. Federal Reserve's recent aggressive interest rate hikes. The products have seen a record $79.6 billion in sales for the third quarter alone, up 27% from last year, according to LIMRA.
LIMRA surveyed more than 900 investors over the summer and found that the top reason that 25% purchased an annuity was the guaranteed lifetime income feature. The second highest reason at 15% was interest rate or projected return.
“The research shows that investors clearly understand the value of the income-generation features, as well as the unique aspects of deferred annuities,” Bryan Hodgens, head of LIMRA Distribution and Retirement Income Research, said in an email.
That rationale was exhibited in what investors planned to use an annuity for. Of those surveyed, 49% said they would use it to supplement Social Security or their pension during retirement while 36% said it was to help accumulate assets toward retirement.
While the main results might demonstrate that investors are seeking guaranteed income, Hodgens pointed out the study also demonstrated that fees are a limited factor among consumers, with as only 2% listing fees as an important factor.
“The perception of annuities is the products have high fees,” Hodgens said. “Fees are rarely mentioned as the most important decision factor, suggesting that, in general, low-fee products are not necessarily at that much of an advantage, and higher-fee products are not at as much of a disadvantage, in the purchase process.”
When determining whether to purchase an annuity, an investor is more focused on sustainable income, along with other factors including interest rates, principal protection, and advisor recommendations, according to Hodgens.
Deferred annuities are an important product to those surveyed because almost 94% of annuity buyers with a formal written plan said they purchased deferred annuities as part of the plan. Deferred annuities are annuities where the investor selects the date that payments will commence. Given the role those specific products have for investors, Hodgens said advisors should be well-informed about them.
“Advisors should also be prepared to meet clients at their level of understanding about deferred annuities, which is likely to come from multiple information sources beyond the advisor,” he said. “The more advisors position annuities in an overall financial plan showing the clients the benefits of the products, the more annuities will be purchased.”
LIMRA surveyed investors between 45 and 80 years old with investable assets of at least $100,000. The study found that older buyers were more inclined to see principal protection as a significant factor in purchasing an annuity. Younger investors tended to focus more on the guaranteed income.
In addition, there was a difference in how the generations worked with an advisor in deciding to purchase an annuity.
“Older and retired annuity buyers were more inclined than younger or non-retired buyers to rely on the recommendation of their advisors, possibly reflecting their greater tendency to have established relationships and regular contact with their advisors,” Hodgens said.