Retirees worry about running out of money and annuities help alleviate that concern – often by providing a guaranteed level of lifetime income. That’s just one of the reasons the annuity market is hot right now. If your clients are thinking about buying annuities – and some of them almost certainly are – it’s important to understand the pros and cons of this product and how the market could change in the near future.
Understanding Annuities
If you’ve ever dreamed of winning a lottery jackpot, you might have contemplated whether you would take your winnings in a lump sum or annuity. The annuity option gives you much more in the long run, but you’ll receive the money in a series of payments over many years.
Using an annuity as a retirement savings vehicle works in a similar way. Investopedia explains that an annuity is an insurance contract that pays out invested funds in a fixed income stream in the future. Annuities can provide a guaranteed income stream during retirement, which is extremely appealing to people who are worried about outliving their retirement savings.
There are different types of annuities. Some of the common options available to annuity buyers include:
- Fixed vs. Variable vs. Indexed: Fixed annuities provide a regular payment, whereas variable annuities provide payments of varying sizes based on the annuity’s investment performance. Indexed annuities provide an indexed return, enabling you to enjoy investment growth with less risk.
- Immediate vs. Deferred: Immediate annuities start paying out immediately, whereas deferred annuities don’t begin paying out until after a predetermined period of time has passed.
- Lifetime Income vs. Fixed Period Payout: An annuity with a lifetime payout will continue paying as long as the owner is alive. An annuity with a fixed period will pay out for the predetermined period.
- Single Premium vs. Flexible Premium: You purchase a single premium annuity with a single payment, whereas you purchase a flexible premium annuity with a series of payments.
The Hot Annuity Market
LIMRA says changes in interest rates drove a spike in income annuity sales in the fourth quarter of 2022. Single premium immediate annuity sales hit $3.2 billion, which was a year-over-year increase of 88%. According to InsuranceNewsNet, annuity sales surged even higher in the first quarter of 2023, with total annuity sales climbing 47% to reach $92.9 billion.
Although some investors are choosing annuities to take advantage of interest rates, many others are simply trying to ease their fears about running out of money in retirement. Many people are feeling the pressure of high inflation rates and a volatile stock market, but these factors are especially concerning for retirees and people approaching retirement. A survey conducted by the American Council of Life Insurers (ACLI) found that 81% of retirement savers are concerned about having enough savings for retirement and 85% of employed adults between the ages of 45 and 65 say inflation has impacted their level of concern about saving enough for retirement.
The Future of the Annuity Market
Many people see annuities as the solution to an uncertain financial future. Interest in annuities may grow as more people become aware of the product. In an ACLI survey, although only 46% of retirement savers said they were familiar with guaranteed lifetime income products that pay out like a pension (i.e., annuities), 73% said they were interested in purchasing such a product.
According to InsuranceNewsNet, LIMRA expects annuity sales to follow a positive trajectory through 2027. Although a drop in interest rates could prompt a slight decrease in sales in 2024, interest in these products is expected to remain high in the foreseeable future.
However, economic fears and interest rates aren’t the only factors to impact annuity sales: legislation could also play a significant role. According to Plan Adviser, the Secure Act 2.0 of 2022 increased flexibility and availability for annuities by removing certain barriers to lifetime annuities in tax-advantaged retirement accounts. Proposed legislation could bring additional changes. According to Plan Sponsor, if the Life Income for Employees Act passes, it could make it easier to use annuities as the default investment in 401(k) plans.
As a result of legislative changes, CNBC says more retirement plans could offer annuity options. The impact this will have on the market for individually purchased annuities is still unclear, but people who have an annuity through their job might be less likely to purchase one on their own. According to the U.S. Bureau of Labor Statistics, 69% of private industry workers had access to employer-provided retirement plans as of March 2022 and the take-up rate was 75%.
Are Your Clients Eager to Buy Annuities?
Given the current popularity of annuities, there’s a good chance many of your clients will be interested in buying one. Agents who are part of the Western Asset Protection network have access to competitive annuity products. If you would like to learn more about selling annuities, reach out to us.