New studies show that, despite relatively stable conditions, fixed annuity sales have increased considerably in 2014 over 2013, as a perhaps unexpected number of clients flock toward these traditional guaranteed income products. While it is unsurprising that products providing guaranteed income for retirees are popular, what is surprising is that the historical motivations behind an upswing in fixed annuity sales are simply not present in today’s market.
Fixed annuities are undeniably trending, but as financial producers and clients alike evaluate retirement income planning goals, the headlines being made by these products has everyone asking the same question: why buy a fixed annuity today?
Historical Shifts Toward Fixed Annuities
Historically, sales of fixed annuity products tend to increase in periods where interest rates are high, which makes sense because higher interest rates allow clients to lock in a greater return at a lower premium cost than would be required to provide the same income level if interest rates were low. Variable annuity products tend to gain in popularity when there are substantial upswings in the equity markets that allow clients to experience greater participation gains through the variable product.
In today’s market, however, interest rates have remained low. Not only have they been relatively stable, but rates have actually fallen slightly from 2013 and 2014. The equity markets have performed comparatively well, which would traditionally lead to an upswing in variable annuity products.
Despite these trends, a recent survey released by LIMRA LOMA Secure Retirement Institute shows that sales of fixed annuities during the first two quarters of 2014 increased 39% when compared to the first half of 2013, while variable annuity sales fell about 5%. Fixed deferred annuities also grew substantially in 2014, increasing 42% over the sales volume seen in the first half of 2013.
Because interest rate and market conditions cannot explain the shift toward fixed annuity products between 2013 and 2014, many industry professionals may be struggling to explain the recent surge in sales as they seek to show current clients why a fixed annuity purchase may be more appropriate this year than last.
Why Buy a Fixed Annuity Today?
Part of this trend toward fixed annuity products may be explained by shifting demographics—baby boomer clients are aging, and the oldest members of this group are now entering (or just a few years away from) retirement. Logically, a client who is just a few years from retirement begins to look for products that will guarantee a certain fixed level of retirement income, thus explaining the shift toward fixed annuity products.
Clients today may also simply feel more comfortable purchasing a fixed annuity product as opposed to a variable annuity. In the past two years, some variable annuity providers have sought to reduce their risk by attempting to modify the investment terms of variable products, while others have attempted to buy these products back from the contract owners. The trend toward fixed annuities may be a manifestation of clients’ unwillingness to accept this risk or a reallocation of dollars previously invested in variable annuity products that were bought back.
Further, fixed annuity products today offer many more options than was historically the case, making them attractive to a wider client market. Fixed indexed annuities can actually provide clients with the ability to participate—to a certain extent—in market gains while protecting against the risk of a downturn. Fixed deferred annuities have also gained attention in recent months with the publication of final IRS regulations governing qualified longevity annuity contracts, drawing clients’ focus toward the goal of achieving guaranteed income late in life.
While the historical explanations for shifts in annuity sales provide little reason for today’s changing market trends, the fact that more of the baby boomer population will enter retirement in the coming years should have advisors paying more attention to fixed products, as this may be a trend that is here to stay.
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