Fixed-rate deferred annuities are having a moment.
According to LIMRA, total fixed-rate deferred annuity sales hit $58.5 billion in the fourth quarter of 2023, which was 52% higher than fourth quarter 2022 sales and the best sales quarter for fixed-rate deferred annuities ever documented.
In 2023, FRD annuity sales totaled $164.9 billion, up 46% from the 2022 annual high of $113 billion.
So what’s behind the record-setting numbers? Look no further than higher interest rates, for starters.
LIMRA points out in a new blog post—Why Fixed-Rate Deferred Annuity Sales Tripled in Two Years—that until 2022, interest rates were so low that traditional annuity products offering principal protection were not viable. But with rising inflation came rising interest rates, which led to competitive FRD annuity crediting rates and a growing demand for products that protect investment principal while offering guaranteed growth.
“Despite equity markets climbing more than 20% in 2023, investors worried about a downturn. This sentiment, combined with strong interest rates, prompted investors to lock in crediting and payout rates offered in fixed annuity products,” said Bryan Hodgens, head of LIMRA research, in a Jan. 24 press release.
The increases in interest rates allowed insurers to raise crediting rates for their FRD products and, as a result, the income that consumers could get from annuities, making them more attractive. While CDs offer a similar value proposition—relatively short-term commitment, principal protection and guaranteed rate of return—their rates have not been able to compete with the FRD annuity rates.
Research shows the average crediting rate for a 3-year FRD annuity product has outperformed the average 3-year CD rates, often at least doubling the return. Insurers are able to offer better rates because their underlying investments are more diverse. Banks, the primary seller of CDs, make money on loans (commercial loans, mortgages, and personal loans), where the margins are much smaller. Meanwhile, insurance carriers invest in a mix of corporate and government bonds, stocks, mortgages, real estate and policy loans. These investments are often longer-term and can offer higher returns than bank loans, the LIMRA brief claims.
Aging demographics another driver
With “Peak 65” in full swing, bringing record numbers of Boomers to retirement and many of them looking for protected income options, the FRD annuity sales are expected to remain high in the coming years.
An estimated 11,200 Americans are expected to retire each day for the next few years, with 4.1 million workers turning 65 every year until 2027.
But LIMRA says don’t forget about the tail end of the Baby Boomer generation—those ages 60 to 64. According to Organization for Economic Co-operation and Development data, the number of Americans ages 60-64 has doubled to over 21 million since 2000. These are people less likely to have pensions and more likely to rely on Social Security and their savings to fund their future retirement.
LIMRA research shows the average age of a FRD annuity buyer is 62—an age where many people are approaching retirement and wanting to secure a portion of their assets in more conservative investments. “Given the economy of the past few years, who wouldn’t consider a product that offers investment protection and guaranteed growth at a higher rate than money market accounts and CDs?” the LIMRA brief states.
Forecast for FRD annuity sales
Economic conditions will remain a primary driver of FRD annuity sales growth over the next few years. Currently, equity market volatility has diminished and there is an expectation that interest rates may come down in 2024. Yet, with inflation stubbornly staying above 3%, the Federal Reserve is likely to take a slow approach to adjusting interest rates, which will benefit FRD product sales, LIMRA says.
In addition, the vast majority of FRD products (88%) sold over the past few years have been 3-year and 5-year contracts, meaning many contracts will be out of the surrender period in 2024 and 2025. LIMRA research suggests that a large portion of these contracts will be renewed or rolled over into another FRD product and that FRD sales will continue to be much higher than those prior to 2022.
As a result, LIMRA is forecasting FRD sales will likely exceed $100 billion in 2024 and 2025. This will be considerably lower than the record set in 2023 but will still double the sales achieved in 2021.
According to a Nov. 2023 LIMRA survey, 49% of private-sector retirement plan sponsors who do not currently offer an in-plan annuity say they’ve considered adding one. Among plan sponsors interested in doing so, 3 in 4 said they would decide within the next 12 months.
SEE ALSO:
• 401(k) Participant Interest in Annuities Surges, LIMRA Says
• What to Consider When Contemplating an Annuity for a Defined Contribution Plan
• Next 12 Months Could be Tipping Point for In-Plan Annuities
• ‘Peak 65’ is Here, and Findings Suggest Annuities Can Protect Income