5 Ways Inflation Could Reshape Annuities

Slideshow March 29, 2022 at 03:26 PM Share & Print

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In the 1970s, U.S. consumer prices headed up like an Apollo rocket.

Ordinary people bought mood rings that changed color when they were happy, earth shoes that put their toes higher than their heels, and commodities futures.

Butchers, bankers, tailors and candlestick makers experimented with gold futures, wheat futures and even the much-ridiculed pork belly futures.

Few investors then knew much more about pork belly futures than current investors know about cryptocurrency, but buying pork belly futures — financial instruments with prices that fluctuated along with the supply of food — was a popular way to tie portfolios to something that looked as if it could help protect an investor against inflation.

Life insurers, meanwhile, had to fight to keep annuity assets from gushing into banks’ certificates of deposit.

For a look at five ways that U.S. individual annuity features could change now, if inflation goes up and stays up, see the gallery above.

Allison Bell

Think_Allison

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1. Flexibility

Back in the mid-1970s, when a typical computer was big enough to fill a closet, insurers responded to inflation by slashing through red tape and bringing variable annuities, or products with crediting rates tied to mutual fund-like funds, to the people.

Today, modern computers and information feeds could help insurers base contracts on new forms of flexibility, such proprietary indexes designed primarily to keep up with inflation, rather than to reduce index volatility.

(Image: Ryk Neethling/Fickr)

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2. Super Laddering

Many financial advisors and economists have written about the idea of laddering, or using two or more annuities, to help clients to manage extreme longevity risk and other types of risk.

The rise of inflation, combined with the rise of computing power, could create new, laddering-based annuity arrays.

Instead of aiming to sell just one annuity, an insurer might arrange to sell bundles of 20, 30 or more annuities, with each annuity in the bundle set to supply levels of income that increase dramatically over time.

(Image: Leckamon/Shutterstock)

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3. Inflation Protection Features

Social Security retirement income has the famous cost of living adjustment provision.

Commercial annuities offer some inflation-protection features under a variety of names, but, fewer, apparently, than they did in the 1990s, when memories of 1970s-era inflation were fresher.

The rise of inflation could do for innovation and standardization of annuity inflation adjustment features now what the sight of gray hair and wrinkles did for annuity income guarantees in the early 2000s.

(Photo: Michael A. Scarcella/ALM)

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4. Inflation Protection Feature Search Tools

Today, many financial columnists write about the idea of annuity inflation adjustment features.

Locating any real-life products with those features is difficult, because insurers and annuity sales websites tend to hide annuity inflation protection options in "other features" sections.

Sustained high inflation could push insurers to highlight inflation-protection features and retail annuity platforms to improve the ability of consumers to search for annuities based on those features.

(Image: fizkes/Adobe)

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5. Hard Assets

Hyperinflation seers such as Marc Faber often recommend that investors move money into "hard assets," such as gold, or single-family homes.

High, sustained inflation could accelerate insurers' efforts to develop variable product investment menus and indexed product index menus that tie the crediting rate performance to portfolios of real estate, precious metals, farmland or wheat futures, rather than to stocks.

(Image: Adobe)

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