Last year’s bond crash was a wake-up for many investors and their advisors. Fixed income assets aren’t always the safe and stable play. To that end, many pre- and current retirees have been looking for any port in the storm that will protect them from any downside risks and keep their income steady.
And it looks like fixed annuities are getting plenty of investor attention.
According to the latest Life Insurance Marketing and Research Association (LIMRA) report, interest and purchases of fixed annuities have exploded during the first half of the year. Given their stable crediting rates, now high yields, and downside protection, it’s easy to see why.
A Big Drop in Bonds Leads to Big Sales in Fixed Annuities
The Federal Reserve’s inflation fighting scheme did one thing. It reminded fixed income investors that bonds don’t always go up and they aren’t immune to price drops. The over 13% decline for the Bloomberg U.S. Aggregate Bond Index last year was a painful lesson for many.
For retirees or those nearing retirement, this lesson hit at perhaps the worst time. After all, they don’t have the decades of compounding left and are often drawing from their assets. At these times, the safety of bonds is often preferred. This fact could help explain why many advisors and those investors near/in their golden years have recently turned to fixed annuities.
And they’ve turned to those products in a big way.
According to the LIMRA—which is one of the largest trade groups for the insurance industry—fixed deferred annuity sales surged to $41.5 billion during the first quarter of 2023. This was the fourth consecutive quarter of growth and was a staggering 161% year-over-year increase. Fixed deferred annuities drove more than 42% of all annuity sales. All in all, total annuity sales—of all varieties—jumped by 49% year-over-year to hit more than $94 billion during the quarter. 1
The Search for Stability & Income
The reason for the surge in adoption of fixed deferred annuities comes down to the product itself and the safety it can provide across both the accumulation and deaccumulation phases. Like all annuities, fixed deferred annuities are contracts between an investor and an insurance company. Here, the insurance company is willing to pay the investor a guaranteed and fixed rate of return for a certain period of time for an initial upfront investment. An investor can lock in 3% to 4% annually for five or 10 years. At the end of the contract term, investors can either take the money, reinvest it in another fixed annuity or begin lifetime income payments.
The key is that unlike bonds, fixed deferred annuities can not lose money if held to maturity. While bonds do offer principal repayment, most investors don’t own individual bonds, but bond funds. Bond funds are constantly rolling over their holdings to meet their mandates and, as such, feature plenty of price fluctuations and yield changes. But using a fixed deferred annuity, portfolios can truly have the stability that many investors and advisors are looking for when it comes to bonds.
According to LIMRA assistant vice president Todd Giesing, the surge in fixed annuity demand was driven by “continued equity market volatility and favorable interest rates coupled with investor concerns about the banking sector and a potential recession.” This plays right into the product’s ballast-like nature.
Additionally, the ability to shield assets from taxes and create a tax-advantaged stream of income in retirement—as annuity payments are a blend of principal return and interest—are bonus benefits that bonds cannot replicate.
With these facts in tow, LIMRA predicts fixed deferred annuity sales to clock above $100 billion for all of 2023. 2
A Great Time to Follow Suit
For investors and advisors, fixed deferred annuities could be exactly what they are looking for. And now could be the best time to buy them. Yields on many annuity products are much higher than a year ago as the Fed has raised rates. This allows portfolios to lock in higher crediting rates.
The thing to remember is that these are supposed to replace part of your bond allocation, not your equity sleeve. This is a common mistake that many investors and advisors make: selling stocks to buy a fixed annuity. Unless you are rebalancing your portfolio and reducing your risk profile, fixed annuities are a bond replacement.
Additionally, investors and advisors looking at fixed deferred annuities need to focus on costs/fees, surrender charges, and crediting rates. The fact these products can’t lose money isn’t free. However, most reputable insurance and annuity issuers will have low fees and not outrageous surrender charges that will fall to zero as time moves on.
As for the crediting rates, thanks to the Fed’s path of interest rate hikes, fixed deferred annuities offer yields as high as 5.45%. That’s very good considering the tax deferral and tax-advantaged income is annuitized.
Low-cost Fixed Deferred Annuity Providers
The Bottom Line
Last year’s bond rout left many investors and advisors looking for answers on how to generate stable returns while reducing losses. It seems they may have found that answer in fixed deferred annuities. According to the latest LIMRA results, sales are booming. And it’s easy to see why. The product’s benefits work for a wide range of scenarios and outcomes.
1 LIMRA (May 2023). Fixed Annuity Sales Double in First Quarter 2023, Driving Record Sales for the Fourth Consecutive Quarte
2 LIMRA (May 2023). Another Record-Breaking Quarter for U.S. Annuity Sales