Annuities rising; consumers seek balance of growth and protection

By Todd Giesing

The financial environment in 2022 — with unprecedented long-term equity market volatility and rapidly rising interest rates at levels not seen since the financial crisis — led to more people seeking the protection offered by fixed annuities.

Sales of protection-based annuity solutions — which include fixed-rate deferred annuities, fixed indexed annuities without a guaranteed living benefit, registered index-linked annuities without a guaranteed living benefit and traditional variable annuities with a guaranteed minimum accumulation benefit — were up a staggering 60% in 2022.

Many of these sales were through the bank channel, as fixed annuities can be a good alternative to bank certificates of deposit. The average fixed-rate deferred crediting rate continued to be more than triple the rates offered in bank CDs, which may have enticed bank customers to buy FRD annuities.

Another appeal of RILAs, FRDs and FIAs is that they are generally shorter-
duration investments — typically three, five or seven years.

This boost in sales did have a downside, as it caused some delays while the industry struggled to meet the demand for protection. The sheer volume of annuity business also took time and resources away from financial professionals, leaving them less time to work with their clients on more complex financial planning.

While protection is hot right now, financial professionals can’t lose sight of the need for guaranteed lifetime income. According to LIMRA research, the single most important factor involved in buying an annuity is having guaranteed lifetime income/withdrawal features.

Looking ahead to the future of annuities

As with all financial solutions, this sales trend won’t last forever. LIMRA is forecasting overall annuity sales will be in the $304 billion to $325 billion range in 2023, which is roughly even with sales in 2022. LIMRA is predicting overall sales will be slightly lower in 2024.

For more than a decade, annuity sales hovered in the $210 billion to $250 billion range. LIMRA’s forecast suggests that protection products will continue to boost growth in the annuity market for the next several years. Although the product mix may shift over time, LIMRA doesn’t anticipate sales going back to those lower numbers.

There are also demographics that will affect the future of annuities, with more people reaching an age when they would consider purchasing one. The average age of an annuity buyer is in the early 60s, with the majority of annuities purchased by people aged 55—70. According to Oxford Economics, the U.S. population aged 65 or over is expected to grow by more than 8.3 million from 2022 to 2027.

With the increased sales in 2022, financial professionals could no longer ignore annuities. It’s likely that more financial professionals entered the annuities space in response to their clients’ needs for the solutions these products offer. This may help going forward as demographics shift and this age category grows.

Where will the money go?

In 2022, there was $113 billion in new FRD sales. Most of those contracts will mature in 2025, 2027 and 2029. Where, then, does that money go? Does it go into an FIA or a RILA, or does it remain in the FRD? For conservative investors, it likely will stay in an FRD, but a lot depends on economic conditions as well as the investors’ needs.

Financial professionals should remain flexible and be willing to find solutions for their clients regardless of future markets or interest rates. There will always be a need for lifetime income and financial security — particularly as more people in the U.S. near retirement age.