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Annuity Sales Buoyed By Fear, Higher Rates – What To Know Before Buying

Consumers are fleeing stock volatility, and insurers are offering more enticing rates for annuities. Annuity sales are expected to reach $267 billion to $288 billion in 2022, above the 2008 high of $265 billion. Limra says the third-highest yearly annuity investment total was $255 billion last year. You can choose from a wide variety of annuities. They may be used as a long-term investment or a kind of retirement plan that provides income for the rest of your life. Insurers provide customers with assurances that protect them against risks such as market volatility and the possibility of running out of money in retirement. Many industry insiders and financial consultants believe that annuity purchases have recently increased because buyers are investors looking to safeguard their money from stock and bond market fluctuations rather than seniors wanting a stable retirement income. Investors are digesting worries about economic growth and the conflict in Ukraine, which has sent the S&P 500 Index down more than 13% this year. There has been a 9% drop in the Bloomberg U.S. Aggregate Bond Index. The Federal Reserve has raised its benchmark interest rate to curb inflation, putting pressure on bond prices. Interest rates move in the opposite direction of bond prices. According to Lee Baker, the founder of Apex Financial Services and Certified Financial Planner (CFP), annuity sales are a “fear trade” because people are worried about the economy.

Personal Finance

These reforms to Social Security can be implemented by Americans willing to do so. Delays, fraud, and racial disparities plagued the COVID Options process for resolving that overdue 401(k) debt. As interest rates rise, insurance firms can provide their customers with better annuity payments and guarantees. Baker anticipates that some customers may accept the sales pitchâ€â€protection from market volatilityâ€â€without fully comprehending the product they’re acquiring. It’s a trade-off, he explained. An annuity may be more expensive than other types of investments like mutual funds because of the premium that insurers demand for their guarantee. A few exceptions apply, but for the most part, customers cannot access their money for several years without incurring penalties.

Fearful of Potential Harm

Fixed-rate deferred annuity purchases reached $16 billion in the first quarter, increasing 45% from the fourth quarter of 2021 and 9% from the same period the previous year, according to Limra’s data. These are similar to a bank’s certificate of deposit. You may expect a certain rate of return for a certain amount of time from an insurance company. It’s possible to get your money back at the end of the term, roll it into a new annuity, or use the funds to start earning income now. According to Todd Giesing, who oversees annuity research at Limra, the average buyer is in their early to mid-60s, around conventional retirement age, and trying to secure their money as they migrate out of work.

A Business Based on Fear

According to Limra, index annuity and buffer annuity sales increased by 21% and 5%, respectively, in the first quarter of this year compared to the same period last year. Each provides a different level of protection against the danger of losing money. An index like the S&P 500 links these annuities, and insurers set a ceiling on profits in rising markets and a limit on losses in falling ones. Atlanta-based CFP Ted Jenkin likens annuities to bowling with bumpers to prevent a gutter ball, which is a common mistake. For retirees looking for a pension-like income, annuities haven’t been as popular with customers. There were $1.5 billion and $370 million in the first quarter for immediate or deferred-income annuities (annuities that begin paying out income now or in the future). Those numbers are unchanged and down 14% from the first quarter of 2021. Giesing, on the other hand, believes that if interest rates increase as projected, this excitement will expand.

Bond Substitute

For those concerned about risk, Baker recommends allocating some of their bond portfolios to a fixed-rate delayed, index, or buffer annuity. According to Baker, the long-term odds favor a diversified portfolio that includes bonds, equities, and real estate regarding annuities. However, there are those people who can’t handle it. On the other hand, ETFs can accomplish the same thing for a fraction of the cost, he noted. Comparing annuity rates from several insurers is recommended by financial advisors. S&P Global Ratings, A.M. Best Company, Fitch Ratings, or Moody’s should also be consulted by consumers to ensure the insurer has a solid credit rating.
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