An annuity is a financial product that provides an income stream to supplement a retiree’s income over time. However, as the financial landscape evolves, so do annuities’ features, benefits, and overall appeal.
Several trends have emerged as the annuity market has evolved in recent years, catering to new customer preferences and adapting to changing economic conditions. As such, there are several major trends in annuities today, and this article examines how these changes impact investors and the broader financial industry.
1. Rising Popularity of Fixed Index Annuities (FIAs)
One of the most notable trends in the annuities space is the increasing popularity of fixed index annuities (FIAs). According to research organization LIMRA, fixed-rate deferred annuities have more than tripled in the last two years, rising to $164.9 billion by 2023. This is in part because of traditional sources of retirement income. Often, employer contributions, social security benefits, pensions, and other investments cannot provide sufficient and consistent retirement income.
In addition, 12,000 baby boomers turn 65 every day in the United States. By 2030, all baby boomers will be 65 years old or older. As such, the popularity of FIAs should continue.
Unlike a traditional fixed annuity, an FIA provides interest linked to the performance of a stock market index, such as the S&P 500. However, it offers a safety net: if the index underperforms, the principal will be protected.
In retirement age, fixed index annuities are becoming more popular due to their unique benefits, such as;
- Downside protection. Nearing retirement, investors are less likely to risk their savings because they have a shorter time horizon. As a result of a guaranteed minimum return, fixed index annuities are protected from market declines.
- Potential for higher returns. In addition to providing a stable return, fixed index annuities can earn more than traditional fixed annuities. To achieve higher risk-adjusted returns, investors can invest in markets that are likely to perform well while also retaining downside protection.
- Inflation protection. Historically, the stock market has outperformed inflation over the long run. Index-tracking fixed annuities help investors maintain their purchasing power during retirement by hedging against inflation.
- Longevity protection. It is possible to convert fixed index annuities into a guaranteed stream of income, which is a valuable source of retirement income. For retirees who may outlive their savings, this is particularly important.
In general, fixed index annuities are a compelling solution for retirees who are concerned both about short-term investing and long-term retirement income.
2. Demand for Customized and Flexible Annuities
Annuity buyers want products that meet their personal financial goals and risk tolerance. J.D. Power states that annuity customers who view their last contact as tailored to their needs are 143 points more satisfied than those who don’t. In response, insurers have begun to offer more customizable annuities.
For example, the popularity of riders (optional benefits that can be added to annuities) is on the rise. Depending on the rider, you can get long-term care coverage, lifetime income guarantees, or even enhanced death benefits.
Moreover, clients are increasingly looking for annuities with flexible income start dates, withdrawal amounts, and the option to convert them into other investment vehicles. In the financial services industry, clients highly value personalization and flexibility.
3. Emergence of Registered Index-Linked Annuities (RILAs)
Another trend gaining traction is the growth of Registered Index-Linked Annuities (RILAs), also known as structured annuities. In fact, RILAs have seen a surge in popularity, with sales tripling since 2017. What’s more, LIMRA forecasts 2024 sales to reach $52 billion.
RILAs allow investors to participate in the market’s upside while limiting losses through predefined buffers. As a result, they allow for a more controlled exposure to equity markets compared to traditional variable annuities.
The popularity of RILAs can be attributed to the fact that they offer more control and predictability in market exposure, which appeals to investors wary of volatility. In recent years, due to the uncertainty and fluctuations in the economy, RILAs have proved to be a desirable middle ground between fixed annuities and variable annuities.
4. Increasing Focus on Guaranteed Lifetime Income Solutions
With many people approaching retirement without traditional pensions, the focus has shifted to reliable lifetime income solutions. Annuities have always been designed to serve this purpose, but now, however, there is a greater emphasis on lifetime income annuities.
Due to an uncertain Social Security environment and longer life expectancies, retirees need lifetime income sources to maintain their lifestyles. According to forecasts, the global life expectancy will increase from 73.6 years old in 2022 to 78.1 years old in 2050 — a 4.5-year increase. With Deferred Income Annuities (DIAs) and Qualified Longevity Annuities (QLACs), payments will begin later in life, thus protecting assets from outliving the owner.
5. Rising Integration of Technology and Digital Platforms
As technology transforms the annuity landscape, consumers and financial advisors can more easily understand, compare, and purchase these complex products. Increasingly, robo-advisors and digital platforms offer solutions that target tech-savvy investors.
Additionally, insurers use advanced analytics and artificial intelligence (AI) to learn more about consumer behavior, tailor their offerings, and optimize their product designs. With digitization, the annuities market is becoming more transparent and accessible, allowing clients to find products that fit their needs more easily.
Accenture reports that artificial intelligence can improve customer experiences by providing more relevant and personalized advice, leading to greater loyalty and satisfaction. Additionally, chatbots and virtual assistants powered by AI are available 24/7, making the annuities market easier to access.
6. Greater Emphasis on Hybrid Products
Increasingly, hybrid annuities combine features of multiple annuity types. As an example, annuities and long-term care insurance can be combined in one product to meet two critical needs of retirees. These hybrid annuities provide lifetime income and protection against potential long-term care expenses in retirement due to rising long-term care costs.
The versatility of hybrid products makes them appealing. Besides providing the security of a traditional annuity, they also address specific concerns, such as healthcare costs. As retirees look for comprehensive solutions to cover various retirement risks, this trend will continue to grow.
“In our evaluation of hybrid annuity TDFs, we used our proprietary Vanguard Life-Cycle Investing Model (VLCM)4 to quantify the additional benefits an investor could receive from blending annuities into traditional target-date funds,” said Roger Aliaga-Díaz, Ph.D., Vanguard’s global head of portfolio construction and chief economist, Americas.
“Using VLCM, we can measure the degree of improvement in an investor’s ability to afford expected living standards throughout retirement, the reduction in the risk of outliving one’s wealth, and mitigation of market risk when using a hybrid annuity TDF versus a traditional TDF.”
7. Environmental, Social, and Governance (ESG) Considerations
As investors become more conscious of environmental, social, and governance (ESG) factors, the annuities market is starting to respond. In fact, according to Morningstar, ESG strategies received $51 billion in inflows in 2020. Some variable annuities now offer ESG-focused investment options as responsible investing becomes more popular.
A variable annuity, for example, may allocate funds to ESG-compliant investments so that policyholders can align their retirement planning with their values. As investors prioritize socially responsible strategies, sustainable investing will gain momentum for annuities.
8. Changes in Regulation and Tax Policies
Annuities are heavily impacted by the regulatory environment. Regulatory changes, tax policy, and fiduciary rules all can affect annuities’ appeal and structure. For example, the SECURE Act 2.0 has made it easier for annuities to be included in employer-sponsored retirement plans, which is likely to increase their adoption.
In addition, regulators are making sure that annuity products are transparent and consumer-friendly. A push is underway to simplify the language in annuity contracts and disclosures, thereby simplifying the buying process for clients. As part of a holistic retirement strategy, these regulatory changes aim to increase consumer confidence in annuities.
9. Growing Importance of Education and Transparency
Consumers are becoming more educated and transparent in light of the complexity of annuity products. However, many investors still find annuities confusing, which can lead to hesitancy in purchasing them. As a result, insurers and financial advisors are increasing their efforts to provide clearer information, make better comparisons, and explain how different annuities work.
This trend is driven by the demand for more transparent and easy-to-understand products, as well as regulatory requirements aimed at protecting consumers. In addition to workshops and online tutorials, detailed product guides also help demystify annuities for ordinary investors.
Conclusion
Annuities are evolving rapidly in response to changing consumer preferences, economic conditions, and technological advancements. Among the most significant trends are the rise of fixed index annuities and RILAs, customization, and guaranteed lifetime income products.
In addition, technology is reshaping annuity buying and management, while hybrid products and ESG considerations are opening up new opportunities for investors. In order to optimize retirement planning strategies, consumers and advisors should keep up-to-date with these trends.
FAQs
Why has there been a surge in annuity sales in recent years?
- As interest rates rise, annuities are becoming more attractive.
- People are seeking guaranteed returns due to concerns about market volatility.
- The aging population is seeking reliable sources of income in retirement.
What are the most popular types of annuities?
- Fixed annuities. You can lock in an interest rate and a payout.
- Variable annuities. Mutual funds have the growth potential, but they also carry market risk.
- Indexed annuities. With downside protection, link returns to a market index.
What are the potential drawbacks of annuities?
- Early withdrawal penalties. Annuities can carry significant fees when surrendered early.
- Lack of flexibility. It can be challenging to change an annuity once it has been purchased.
- Complexity. In addition to being complex financial instruments, annuities require careful consideration.
Are there other options for retirement income?
- 401(k) s and IRAs. You can invest in these retirement accounts in various ways and enjoy tax advantages.
- Social Security. Providing retirement benefits through a government-funded program.
How can I determine if an annuity is right for me?
- Consult a financial advisor. Their assessment can help you determine what you need and what you want.
- Understand your risk tolerance. Be aware of your comfort level when it comes to market volatility.
- Evaluate your income needs. To retire comfortably, you must determine how much income you will need.
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