What's Behind The Boom In Annuity Sales?
In the second quarter of 2021, annuity sales were off the charts.
"Our preliminary second quarter numbers are the highest we have seen since the fourth quarter of 2008, and the third-highest quarter on record," said Todd Giesing, assistant vice president and head of annuity research at Windsor, Conn.-based Secure Retirement Institute (SRI).
Every quarter, SRI releases annuity sales data. But this release was particularly surprising to some, given the backdrop of the pandemic. Total annuity sales for the quarter jumped 39% from the corresponding period a year earlier, led by variable annuities (VAs), which surged 55%; fixed annuity sales rose 27%.
"As business continued to open up, Americans likely started to get back to a more normal mindset, bringing factors such as retirement and income planning discussions back to the table," said Giesing.
Coming Off A Terrible Year
While that's no doubt true, it's also worth noting that the previous year's figures were particularly bad. In 2020, second quarter sales dropped 24% year-over-year, with VA sales down 20% and fixed annuities off by 26%. That, of course, was at the height of pandemic panic, a time when equity markets plummeted some 30% amid a near-total economic shutdown. From there, annuities sales practically had nowhere to go but up. They were bound to rebound.
Still, some advisors insist that last year's drastic drop-off doesn't completely explain this year's quarterly uptick. "While the pandemic may have suppressed some 2020 sales, financial professional continued to serve their clients remotely," observed Paula Nelson, co-head of individual markets at Global Atlantic.
Rather, Nelson argued that the sales increase reflects a growing appetite for what annuities offer—particularly, their advantages over fixed income securities. "The sustained, long-term duration of the low-rate environment is reaching a critical point for people saving for retirement, and they are looking to annuities as a meaningful alternative, offering growth potential and tax deferral," she said.
A Groundswell Of Demand
Frank O'Connor, vice president of research and outreach at the Insured Retirement Institute in Washington, D.C., concurred. "More Americans are reaching retirement age every day, so there is a groundswell of demand for guaranteed income and principal safety," he said. At the same time, he added, it's "very difficult to find yield anywhere in fixed income [markets] without going to riskier investments such as junk bonds."
Low interest rates also help explain why VA sales outstripped those of fixed annuities by 28% in the quarter. Fixed annuities have a fixed rate of return that's essentially linked to interest rates. VAs, on the other hand, invest in mutual-fund-like subaccounts whose value rises and falls with the equity markets. The long-running bull market has helped VAs outsell fixed annuities for several years.
"Some of the increase can be attributed to the continued and lengthy bull market, but this is also a tale of 'rising tides lift all boats,'" noted Nicholas Ross, chief distribution officer at Financial Independence Group in Charlotte, N.C. "Many advisors who have slowed or stopped VA usage in the recent past are again reviewing [them]."
At the same time, fixed indexed annuities (FIAs) saw year-over-year sales growth of 28% in the quarter, a huge improvement from Q2 of last year, when sales plunged 41%. FIAs, which tie performance to a market index such as the S&P 500, differ from VAs and fixed annuities; they offer zero downside risk in return for limited upside potential.
Giesing at SRI credited part of the FIA increase to new products that allow clients to capture a higher percentage of index gains.
Leading all annuity sales, however—as they have for the past several years—were registered index-linked annuities (RILAs). Sales of these so-called "buffered annuities" skyrocketed a whopping 122% in the quarter year-over-year. A sort of hybrid of FIAs and VAs, they link performance to a market index, but with greater upside potential than most FIAs, in exchange for a lesser degree of downside protection.
"I’m very bullish on this product category," said Corey Walther, president of Allianz Life Financial Services in Minneapolis. He cited high consumer appetite for market participation with some downside protection, product innovations that offer customers more options and address varying degrees of risk tolerance, and improved awareness of these products.
Yet others are less sure how long the RILA boom will continue. "Whenever there’s a prolonged bout of market volatility, investors value some level of downside protection and are willing to allocate to strategies that offer it. [But] the real question is whether it will last when the macroeconomic tailwinds for RILAs turn into headwinds," said Bobby Samuelson, president of Life Innovators, an independent insurance and annuity product development firm in Charlotte, N.C.
Another tailwind for annuities in general may be coming from the nation's capital—specifically, proposals to raise income taxes on the wealthiest Americans and capital gains taxes retroactively. "Concerns are on the rise," said Eric Henderson, president of Nationwide Financial’s annuity segment in Columbus, Ohio. Annuities can "help clients achieve greater tax diversification, giving them greater control and flexibility over how much they owe in taxes and when those taxes are paid," he explained.
Retirement Income Remains Top Concern
To be sure, there are many other reasons to expect continued growth in annuity sales. A 2021 study by Radnor, Pa.-based Lincoln Financial Group found that 90% of investors want their retirement income plan to provide a guaranteed income payment or principal protection, said Tim Seifert, a senior vice president and head of retirement solutions distribution at Lincoln. These are characteristics that only annuities can provide.
Moreover, the aging population means more Americans than ever will "move beyond just accumulating savings and think about their actual income needs in what could be 20, 30 or more years of retirement," said Cyrus Bamji, head of communications at the Alliance for Lifetime Income in Washington, D.C.
He added that product innovations have generated "new annuity solutions that better serve changing consumer needs"—and consumer awareness and understanding of what annuities can offer is on the rise.
Among the innovations are less expensive, no-load, commission-free annuities for fee-only advisors. "As guaranteed income products—particularly the commission-free ones—become more accessible to RIAs, annuities will gain popularity," said Shannon Stone, an advisor at Oakland, Calif.-based DHR Investment Counsel.
But perhaps the best reason for remaining bullish on annuities is that the market offers few viable alternatives. "With low interest rates and increasing longevity, traditional safe investments like bonds add very little value to a retirement portfolio, particularly when compared to an annuity," said David Lau, CEO of DPL Financial Partners in Louisville, Ky. "There has rarely been a more compelling time to use annuities."