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Demand growing for fixed indexed annuities

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The market for fixed indexed annuity (FIA) is strong and rapidly growing. FIA sales increased 24 percent during the past year, rising to $48 billion in 2014, according to a recent study from the Insured Retirement Institute (IRI), 2015 Fixed Indexed Annuity Distribution Trends.

The IRI study surveyed 15 broker-dealers/distributors across all third party channels to form a picture of how the landscape for these products is evolving, and how distributors are managing the rapid growth of FIAs. It revealed that fixed indexed annuities (FIAs) are quickly becoming a more important part of broker-dealers’ annuity business. FIAs accounted for about 10 percent of total broker-dealer annuity sales in 2014—and half of broker-dealers expect this percentage to grow in 2015 and beyond, according to the survey.

About sixty percent of firms surveyed for the study say that annuities comprise between 10 percent and 25 percent of their total product sales. Approximately 78 percent of survey respondents said their FIA sales are growing either modestly or significantly, while the remainder said that sales were holding steady. None of the survey participants said FIA sales were declining.

Respondents cited five top factors they expected to drive future FIA sales growth:

  • Higher interest rates;
  • Lifetime income benefits similar to those offered with variable annuities;
  • Concern that lifetime income benefits may be less generous in the future;
  • Value of principal protection with some upside potential; and
  • Persistent low interest rates.

While it seems paradoxical that study participants said that both higher interest rates and persistent low interest rates could potentially drive FIA sales in the future, the report explains that this accounts for two different perspectives. “In a persistent low interest rate environment, sales are boosted by the product being an attractive alternative to low interest products such as CDs. As rates rise, index options become less expensive and FIAs are able to provide more upside potential, making the product more attractive from a growth standpoint,” the report states.

Of greatest importance to consumers is that their principal is safe, but also highly important is that an FIA can promise a fixed income substitute—providing a bond-like return but without the interest rate risk of a bond. Today’s FIA buyers are especially drawn to the product by one specific benefit: guaranteed lifetime income. Almost half of study participants noted that about 50 percent of their FIA sales include a lifetime income benefit.

“The retirement income market continues to evolve its product offerings, developing innovative strategies to deliver guaranteed lifetime income to consumers,” said IRI President and CEO Cathy Weatherford in a prepared statement. “The evolution of fixed indexed annuities is representative of this trend, with a significant percentage of FIAs being sold with lifetime income benefit.”

The IRI study revealed that variable annuities still represent nearly half of premium dollars in third-party distribution channels. However, FIA sales are growing, appealing to both advisors and their customers. FIAs can provide principal protection and some upside potential, as well as the attractive guaranteed lifetime income benefits so attractive in the variable annuity products.