Higher Interest Rates Reshape the Annuity Market
For advisors, the hot flavors of the first quarter were "guarantees" and "fund menus."
Interest rate increases helped sales of two major types of nonvariable annuities in the first quarter, according to new life insurer survey data from the LIMRA.
Sales of nonvariable indexed annuities — which can protect holders against loss of account value — climbed 21% between the first quarter of 2021 and the latest quarter, to about $16.3 billion.
Sales of traditional fixed-rate deferred annuities rose 9%, to $15.9 billion.
Traditional variable annuities continued to lose share, with sales falling 11%, to $18.5 billion — but that class of products continued to be the most popular one on the market. Sales of registered index-linked annuities, or RILA contracts, increased 5% but still accounted for just $9.6 billion of total sales.
Overall sales increased 4%, year-over-year, to about $63 billion.
What It Means
For annuity advisors, the news here may be that the account value guarantees in nonvariable traditional indexed annuities and the wide range of investment fund options in traditional variable annuities still have client appeal on days when investment markets look complicated.
Details
Here’s how sales of five types of annuities changed between the first quarter of 2021 and the latest quarter:
- Traditional variable annuities: $18.5 billion (down from $20.9 billion).
- Nonvariable indexed annuities: $16.3 billion (up from $13.5 billion).
- Fixed-rate deferred annuities: $15.9 billion (up from $14.6 billion).
- Registered index-linked annuities: $9.6 billion (up from $9.2 billion).
- Fixed immediate: $1.5 billion (unchanged).
Annuity Basics
An annuity is a product that can convert a stream of premium payments, or one big premium payment, into a stream of income payments.
Insurers call annuities set to begin paying benefits within 12 month after the date of purchase “immediate annuities” and contracts set to begin making payments at a later start date “deferred annuities.”
A “variable annuity” is an annuity registered with the SEC as a security. The issuer of a variable annuity may expose the holder to the risk of loss of account value.
The holder of a traditional variable annuity can get returns tied to the performance of one or more funds that resemble mutual funds.
The holder of a registered index-linked annuity, or RILA, gets returns tied to the performance of one or more investment indexes.
A nonvariable annuity is under the jurisdiction of state insurance departments, not the SEC, and its issuer promises to protect the contract holder’s account value.
The holder gets a guaranteed rate of return from the issuing insurer.
The holder of a nonvariable indexed annuity may also get extra interest payments, with the size of the extra interest payments tied to the performance of designated investment indexes.
The Deferred Income Annuity Dilemma
Many advisors and economists are fond of deferred income annuities, or contracts set to pay a stream of benefits far in the future.
A retiree with relatively little cash can use a deferred income annuity to insure against extreme longevity risk, by paying a small amount to get an annuity that can pay benefits for as long as the retiree lives.
But in the United States, sales of deferred income annuity products have been low in recent years. Deferred income annuity sales amounted to less than $400 million in the latest quarter and were about 14% lower than in the year-earlier quarter, according to LIMRA data.
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