Annuity sales hit record in 2022 amid higher interest rates and fear

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Amid stock market turmoil, fears of a recession and higher payouts, consumers last year pumped record sums into annuities, a type of insurance that provides a guaranteed income stream.

Buyers funneled $310.6 billion into annuities in 2022, according to estimates published by Limra, an insurance industry trade group.

That number is a 17% increase over the previous record set in 2008, when consumers bought $265 billion in annuities. That year, America was in the throes of the Great Depression and the stock market eventually went down with a 57% loss.

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The same was seen in 2022 S&P 500 Index Post its worst loss since 2008, ending the year down 19.4%. The U.S. Federal Reserve aggressively raised interest rates to control high inflation, raising concerns that the central bank could inadvertently lead the nation into recession.

“In bad times, people worry about security,” said Lee Baker, a certified financial planner and founder of Apex Financial Services in Atlanta and a member of CNBC’s advisory council.

A ‘unique’ confluence of factors boosted annuity sales

There are many types of annuities. They generally fall into two categories: An investment or semi-pension plan provides a guaranteed level of income for life in retirement.

All annuities are issued by insurance companies, which hedge against risks such as market volatility or the threat of surviving savings in old age.

Annuities have also benefited from the Fed’s cycle of raising interest rates, which has translated into better returns on investments. Meanwhile, U.S. bonds — which typically act as ballast when stocks fall — faced their worst year on record in 2022, leaving few options for savers looking for relative safety and a decent return.

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“It was a unique year,” said Todd Giesing, assistant vice president of Limra Annuity Research, about the factors driving record annuity sales.

Anything that is based on security and has some downside security is doing very well.

Todd Giesing

Assistant Vice President of Limra Annuity Research

Consumers were especially tight-lipped about fixed-rate deferred annuities last year. Total sales — $112.1 billion — more than doubled 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 certificates of deposit offered by banks. Insurers guarantee the rate of return over a fixed period, up to 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 over its 2019 record, Limra said.

Indexed annuities hedge against downside risk. They are tied to a market index such as the S&P 500; Insurers cap income at the top when the market is good but put a loss floor if it tanks.

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“Anything that’s based on security and has some downside security is doing very well,” Giesing told CNBC last fall.

Meanwhile, consumers are turning away from variable annuities, whose performance is typically tied directly to the stock market. Annual sales of $61.7 billion were the lowest since 1995, Limra said.

Although 2022’s confluence of factors — large stock and bond losses and rapidly rising interest rates — is unlikely to continue in the near term, demographic trends such as baby boomer retirements underline long-term growth potential for annuity sales, Giesing said. He said the average buyer is around 63 years old.

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How to know if an annuity makes sense for you

Annuities may not make sense for everyone, according to financial advisors.

When constructing financial plans, advisors often recommend a few less-used annuity types: 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. Payments from immediate annuities begin immediately, while deferred-income annuities begin later, perhaps in the retiree’s 70s or 80s.

These payments, along with other guaranteed sources of income like Social Security, help ensure a retiree has cash to cover needs like a mortgage, utilities and food if they live longer than expected and their investments tap out or decline.

The fancier the annuity, the higher the underlying fees. And most people don’t understand the limitations. It is important to know what you are buying.

Carolyn McClanahan

Founder of Life Plan 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 in Jacksonville, Florida, told CNBC.

McClanahan, a member of CNBC’s advisory council, does not use single-premium immediate annuities or deferred income annuities for clients with enough money to live comfortably in retirement.

Annuities become a priority for those people somewhere in between: customers who have the potential but don’t necessarily have enough money. For them, it’s an emotional calculation: Does a more guaranteed income provide peace of mind?

‘Most people don’t understand limitations’

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Of course, different categories of annuities come with tradeoffs.

Single-premium immediate annuities and deferred-income annuities are relatively simple to understand compared to other categories, advisers said. The buyer transfers a lump sum to the insurer, who guarantees a fixed monthly payment to the buyer either now (immediate annuity) or later (fixed-income annuity).

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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 more inherent fees there are,” McClanahan said. “And a lot of 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—called “guaranteed living benefits”—that give buyers a choice between a lifetime income stream or liquidity (that is, some of their money back) if they need the funds soon. No longer want their investment. Those benefit features typically have higher costs, as well as restrictions and other fine print that can be difficult for consumers to understand, consultants said.

In contrast, however, consumers may not get their principal back when they purchase single-premium immediate annuities or deferred-income annuities. That’s one possible reason why consumers don’t buy them easily, despite their income potential, Giesing said.

Single-premium immediate annuity Sales in 2022 were $9.1 billion, and consumers bought about $2.1 billion in deferred income annuities, Limra said. For reference, those figures are one-twelfth and one-fiftieth third of fixed-rate deferred annual sales, respectively.

Security-focused annuities may make sense for someone five to 10 years away from retirement who can’t stomach the volatility of investments and is willing to pay a slightly higher cost for stability, Baker said.

However, their value proposition may not make sense for all investors at a time when they can no longer afford short-term U.S. Treasury bonds (A 3-months, 1 year and 2 years, for example) if they hold those bonds to maturity, Baker said. However, those Treasury bonds do not guarantee a fixed income stream like annuities.


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