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Amid stock market gyrations, recession fears and higher payouts, consumers pumped a record sum of money last year into annuities, a type of insurance that offers a guaranteed income stream.
Buyers will spend $310.6 billion in annuities by 2022, according to estimates published by Limra, an insurance industry trade group.
This figure is a 17% increase over the previous record set in 2008, when consumers purchased $265 billion of annuities. This year, the US
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Similarly, 2022 saw the S&P 500 index Post its worst loss since 2008, ending the year down 19.4%. The US
“In bad times, people get concerned about safety,” said Lee Baker, a certified financial planner and founder of Apex Financial Services, based in Atlanta, and a member of CNBC’s advisory council.
‘Unique’ confluence of factors drove annuity sales
There are many types of annuities. They generally fall into two categories: an investment or a quasi-pension plan that offers a guaranteed level of income for life in retirement.
All annuities are issued by insurance companies, which hedge risks such as market volatility or the danger of outliving savings in old age.
Annuities have also benefited from the Fed’s cycle of rising interest rates, which has translated into a better return on investment. Currently, US
“This was a unique year,” Todd Gissing, assistant vice president of Limra Annuity Research, said of the factors that combined to drive record annual sales.
Anything that is protection-based and has some downside protection is doing very well.
Assistant vice president of Limra Annuity Research
Consumers were particularly tight-lipped about fixed-rate deferred annuities last year. Total sales — $112.1 billion — more than doubled those in 2021 and broke the previous annual record set in 2002, when consumers bought $80.8 billion, according to Limra data.
Fixed-rate deferred annuities work like a certificate of deposit offered by a bank. Insurers guarantee a rate of return over a set period of time, maybe three or five years. At the end of the term, buyers can get their money back, roll it into another annuity or convert their money into an income stream.
Another category — indexed annuities — captured $79.4 billion, an 8% increase on its 2019 record, Limra said.
Indexed annuities hedge against downside risk. They are tied to a market index like the S&P 500; Insurers cap earnings to the upside when the market is good but put a floor on losses if it tanks.
“Anything that is protection-based and has some downside protection is doing very well,” Giesing told CNBC last fall.
Meanwhile, consumers have shied away from variable annuities, the performance of which is generally directly tied to the stock market. Annual sales of $61.7 billion were the lowest since 1995, Limra said.
While it’s unlikely that the confluence of factors from 2022 — like large stock and bond losses and rapidly rising interest rates — will persist in the near term, demographic trends like baby boomer retirements support long-term growth potential for annuity sales, Giesing said. . The average buyer is around 63 years old, he said.
How to know if an annuity makes sense for you
Annuities may not make sense for everyone, according to financial advisors.
Advisors often recommend some less-used annuity types when building financial plans: a single-premium immediate annuity or a deferred income annuity.
These are for retirees looking for a guaranteed, pension-like income every month for life. Payouts from immediate annuities start immediately, while those from deferred income annuities start later, perhaps in a retiree’s 70s or 80s.
These payments, along with other guaranteed sources of income like Social Security, help ensure that a retiree has money to cover necessities like a mortgage, utilities and food if they live longer than expected and their investments are tapped or dwindling.
The more fantastic the annuity, the more the underlying fees are. And many people do not understand the limitations. It is important to know what you are buying.
Founder of Life Planning Partners
“Am I worried about the client running out of money? If so, that’s when I think about an annuity,” Carolyn McClanahan, a CFP and founder of Life Planning Partners, based in Jacksonville, Fla., told CNBC.
McClanahan, a member of CNBC’s advisory council, does not use single-premium immediate annuities or deferred-income annuities with clients who have more than enough money to live comfortably in retirement.
Annuities are becoming more of a preference for those somewhere in the middle: clients who are likely but not necessarily going to have enough money. For them, it’s more of an emotional calculus: Will having more guaranteed income offer peace of mind?
“A lot of people don’t understand the limitations”
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Of course, different categories of annuities come with tradeoffs.
Single-premium straight annuities and deferred income annuities are relatively simple to understand compared to other categories, advisers said. The buyer hands over a lump sum to the insurer, who then guarantees a certain monthly payment to the buyer starting now (an immediate annuity) or later (a deferred income annuity).
They also offer retirees the biggest bang for their buck relative to other types, according to advisors and insurance experts.
That’s because they don’t come with bells and whistles that cost buyers money.
“The fancier the annuity, the higher the underlying fees are,” McClanahan said. “And many people don’t understand the limitations. It’s important to know what you’re buying.”
For example, consumers can buy variable and indexed annuities with certain features—known as “guaranteed living benefits”—that give buyers the choice between a lifetime income stream or for liquidity (ie, some of their money back) if they Need money early or no longer want their investment. The benefit features also generally come with higher costs, as well as restrictions and other fine print that can be difficult for consumers to understand, advisers said.
In contrast, however, consumers cannot get their principal back when they buy single-premium immediate annuities or deferred income annuities. That’s one likely reason consumers don’t buy them as readily, despite their income efficiency, Giesing said.
Single-premium immediate annuity Sales were $9.1 billion in 2022, and consumers bought about $2.1 billion of deferred income annuities, Limra said. For context, these figures are about one-twelfth and fifty-third of fixed-rate deferred annuity sales, respectively.
Protection-focused annuities might make sense for someone five to 10 years away from retirement who can’t stomach investment volatility and is willing to pay a slightly higher price for stability, Baker said.
However, their value proposition may not make sense for all investors at a time when they can now get a return of over 4% on safe-haven assets like shorter-term US stocks. it. Treasury bonds (a 3-month, 1 year And 2-year, for example) if they hold the bonds to maturity, Baker said. However, Treasury bonds do not guarantee a secure income stream like annuities.