Fixed vs. Variable Annuities: The Tables Have Turned

What to Expect in 2024

It’s hard to see these annuity trends changing in 2024. The baby boomers are not getting any younger and there will be more baby boomers turning 65 in 2024 and 2025 than there were last year. No matter what markets do, it’s hard to imagine that they are going to suddenly cast aside their desire for downside protection and seek out more aggressive investment alternatives. 

One thing that all the record-setting annuity categories have in common is that their sales are, to a great extent, rate-driven. In 2023, we saw crediting rates on all these products at levels not seen in years. The results for the current year will be largely driven by what happens to interest rates.

Most market analysts expect the Fed to cut rates several times in 2024. If this occurs, then it is almost certain that 2024 sales in fixed annuities and FIAs will set yet another record. In fact, it’s highly likely they will both smash this year’s records.

Due to the time it takes to submit an annuity order, insurance companies typically give advisors two or three weeks’ notice about any rate cuts. Therefore, each announced rate cut creates a fire sale that inevitably leads to a large spike in sales. If 2024 becomes a year of one rate cut after another, the real issue the industry will be dealing with will be the backlogs of unprocessed applications. This could create both a very jubilant and painful year for the industry overall.

But what about the lowly and increasingly neglected variable annuity? Has its time in the sun come to an end?

While it’s not likely going to get much attention from the baby boomers that previously bought the product in mass quantities, there’s now a new generation of investors that need both equity exposure and protection from taxes. Like their parents, they are likely to see the benefit of purchasing a product that allows them to invest after-tax money into funds of all asset classes and do reallocations between these asset classes without creating a taxable event. In fact, they take advantage of that concept today every time they put more money into their 401(k) or IRA.

As these investors accumulate more disposable income, they will be interested in investing that extra money into a similar investment vehicle. In my mind, the only key question is: How long will it take for the annuity industry to go after this generation? Until it does, it’s likely variable annuity sales will continue to languish.

Scott Stolz is a managing director at iCapital Solutions.