Low interest rates also help explain why VA sales outstripped those of fixed annuities by 28% in the quarter. Fixed annuities have a fixed rate of return that's essentially linked to interest rates. VAs, on the other hand, invest in mutual-fund-like subaccounts whose value rises and falls with the equity markets. The long-running bull market has helped VAs outsell fixed annuities for several years.
"Some of the increase can be attributed to the continued and lengthy bull market, but this is also a tale of 'rising tides lift all boats,'" noted Nicholas Ross, chief distribution officer at Financial Independence Group in Charlotte, N.C. "Many advisors who have slowed or stopped VA usage in the recent past are again reviewing [them]."
Indexed Annuities
At the same time, fixed indexed annuities (FIAs) saw year-over-year sales growth of 28% in the quarter, a huge improvement from Q2 of last year, when sales plunged 41%. FIAs, which tie performance to a market index such as the S&P 500, differ from VAs and fixed annuities; they offer zero downside risk in return for limited upside potential.
Giesing at SRI credited part of the FIA increase to new products that allow clients to capture a higher percentage of index gains.
RILAs
Leading all annuity sales, however—as they have for the past several years—were registered index-linked annuities (RILAs). Sales of these so-called "buffered annuities" skyrocketed a whopping 122% in the quarter year-over-year. A sort of hybrid of FIAs and VAs, they link performance to a market index, but with greater upside potential than most FIAs, in exchange for a lesser degree of downside protection.
"I’m very bullish on this product category," said Corey Walther, president of Allianz Life Financial Services in Minneapolis. He cited high consumer appetite for market participation with some downside protection, product innovations that offer customers more options and address varying degrees of risk tolerance, and improved awareness of these products.
Yet others are less sure how long the RILA boom will continue. "Whenever there’s a prolonged bout of market volatility, investors value some level of downside protection and are willing to allocate to strategies that offer it. [But] the real question is whether it will last when the macroeconomic tailwinds for RILAs turn into headwinds," said Bobby Samuelson, president of Life Innovators, an independent insurance and annuity product development firm in Charlotte, N.C.
Tax Considerations
Another tailwind for annuities in general may be coming from the nation's capital—specifically, proposals to raise income taxes on the wealthiest Americans and capital gains taxes retroactively. "Concerns are on the rise," said Eric Henderson, president of Nationwide Financial’s annuity segment in Columbus, Ohio. Annuities can "help clients achieve greater tax diversification, giving them greater control and flexibility over how much they owe in taxes and when those taxes are paid," he explained.