Amid the bear market and persistent inflation, it's been a tough year for 401(k)s and other defined-contribution retirement plans. For annuities, on the other hand, business is booming.
In the summer of 2022, annuities — insurance products that provide a pension-like income in retirement — continued a historic winning streak. The products enjoyed their second straight quarter of record-breaking sales, reaching a total of $80.7 billion — 29% more than the same quarter last year. According to
The new figures top the previous record, which was set just last quarter. In that period, annuity sales reached $77.5 billion — at the time, the highest quarter of sales ever recorded. And experts in the industry say there's no end in sight.
"I still believe this is just getting started," said David Lau, the founder of
What's driving this boom? Experts say the same factors that are dragging down the broader economy are driving annuities to new heights. Rising interest rates, for example, push up the yield from bonds, which often means bigger payments for annuity holders. And as stocks tumble, the relative stability of annuities makes them a more attractive option for retirement.
"The rate environment, coupled with difficult market and economic conditions, have led to many advisors, and their clients, flocking to annuities for safety," Cerulli Associates, a Boston-based research group, wrote in a
Lau believes there's also another factor at play. As stocks — both domestic and foreign — and bonds all become more intertwined, diversifying one's portfolio is harder than ever. Annuities, he said, can provide an income that's largely independent of other asset classes.
"The need for asset protection and lifetime income just continues to increase," Lau said. "You need to bring something that is not going to go down with the rest of the market."
Not all annuities have shared equally in the profits. At the high end, fixed-rate deferred annuities saw their best quarter ever, with sales of $30 billion — 161% more than the same period last year. Fixed indexed annuities also had a record quarter, with sales of $21.5 billion. And the newest category, registered index-linked annuities (RILA), reached $10.6 billion, 14% more than last year's third quarter.
Meanwhile, other annuities declined. Sales of traditional variable annuities (not including RILAs) dropped to $14.1 billion, down 34% from the same time last year. And deferred income annuities, which delay payments until a certain date or event, also fell — although only by 1% — to $505 million.
What's behind this wide variety of sales numbers? Lau believes the difference lies in the products themselves. While fixed annuities offer a guaranteed rate of interest — an appealingly reliable income in today's market — the payments from a variable annuity depend on how well its portfolio is doing.
"Variable [annuities] are down because people want to be out of the market," Lau said. "If you're feeling the pain of the market, you want to go to something that's going to take you away from it and give you some protection."
In spite of these disparities, the net result has been an extraordinary year for annuities. In 2022 so far, total sales have reached $223.4 billion — 17% higher than in the first three quarters of 2021.
And experts expect the surge to continue. In its study, Cerulli projects that traditional fixed annuities will reach $70 billion in sales by the end of 2022 — their highest level since the firm started studying them in 2005. Cerulli is also bullish on RILAs, which it says will make up 23% of all annuity sales by 2027 — up from 17% this year.
What can advisors learn from all this? Lau thinks the data sends a clear message about annuities.
"I think this clearly shows that clients want them," he said. "They want income, they want downside protection, and it just can't be delivered through investments these days."
