Our July focus topic is financial independence – and what signifies independence better than guaranteed lifetime income?
Last year, we published an article titled “Six Reasons to Sell Annuities.” The good news? Those reasons are still valid – and now there are even more reasons to consider them as part of an overall strategy to protect your clients’ standard of living in retirement.
No time to read? Watch our video overview:
In early 2021, annuities had a moment. Q1 sales were up 9% over Q1 sales in 2020, according to the SRI's Individual Annuity Sales Survey. However, demand is still decreasing when you look at the overall sales trend for the past 5 years.
But experts predict that's about to change…
…and that now is a good time to talk about how an annuity makes sense as part of a comprehensive strategy for your clients’ financial independence.
1. Inflation and higher interest rates would be good for annuities
No one wants to pay more for lumber or used cars. That’s why many consumers are afraid of inflation – it means their money buys fewer goods or services. But if you’re trying to show a client what an annuity can do for them, higher interest rates (which often accompany inflation) are a good thing.
When interest rates are low, the money paid into an annuity accumulates less interest and grows more slowly over time. That leaves the insurance company with two options: (1) find a new investment strategy on the back-end to guarantee higher returns, or (2) reduce the amount of guaranteed interest their products offer. As a consumer, you don’t want either of those options. You don’t want your provider to make any risky investment moves, and you don’t want to see your guarantees reduced.
As of May 2021, the inflation forecast for the Personal Consumption Expenditures Price Index jumped from 2.3% to 2.9%.
Recently, Treasury Secretary Janet Yellen has said inflation and rising interest rates could be good for the economy. And interest rates recently hit a one-year high this spring – although that high is still incredibly low, historically. As an example of how historically low, check out the difference in 10-year Treasury yields: 15% in 1981 to 0.52% in August of 2020. (Source: benefitspro.com)
But as we continue to recover from the pandemic, we should expect interest rates to rise, albeit slowly. Annuities are a one way to take advantage of that rise, and let your increased gains act as a hedge against the damage inflation may do to your clients’ retirement savings in other financial vehicles.
2. RILA offerings are killing it
Registered index linked annuities are hot. In 2020, they accounted for about 25% of all variable annuity sales. (Source: LIMRA Secure Retirement Institute) In Q1 of 2021, RILA sales clocked in at $9.2 billion (89% more than in 2020). You might be more familiar with their nicknames, “buffer annuities” or “buffered variable annuities.”
What makes these annuities different? Your client can set the maximum percentage of loss they find acceptable in a down market (the “floor”). The carrier absorbs any loss below your client’s floor. The trade-off? In an up market, gains are capped at the same percentage.
RILA sales grew 88% in the first quarter of 2021, accounting for over 30% of total variable annuity sales.
Alternatively, a RILA might offer a buffer, which is an amount you subtract from the overall percentage of loss or gain. Say your client selects a 5% buffer. If the index gains 10%, 5% (their buffer) will be subtracted, leaving them with a 5% gain. If the index loses 10%, the same situation applies – their 5% buffer is subtracted, leaving them with a 5% loss.
When interest rates are as low as they are, it becomes incredibly difficult for carriers to offer variable annuities with popular add-ons like living benefits – the interest rate just isn’t growing that cash at a high enough rate to offset the cost of those living benefits. In 2020, Transamerica and Prudential backed off on offering variable annuities with living benefits for this reason.
But that's where you can step in as the agent and ensure their life insurance policies have those desirable add-ons. After all, an annuity probably isn't the only thing your client can or should purchase from you. Accumulation-only products like RILAs are designed to do one thing - create a stream of guaranteed lifetime income. Newer options offer more liquidity than before, including free annual withdrawals of a certain percentage of the contract value. Some RILAs have no annual fees. Some offer indexes with additional growth potential for an annual fee. The right product combination all depends on your client's needs, goals, and risk tolerance.
3. Experts say a rebound is coming
LIMRA’s Secure Retirement Institute (SRI) predicts sales of every annuity type except variable and fixed-rate deferred to grow in 2021. The pandemic put a dramatic hold on long-term thinking as people struggled to make it through the short term. But now that things are stabilizing, long-term thinking can start driving buying decisions yet again.
By 2025, the SRI predicts the annuity market to grow up to 30%. (Source: InsuranceNewsNet.com)
By 2025, the SRI predicts the annuity market to grow up to 30%.
As we mentioned above, low interest rates are not good for annuity sales. But as the market improves and interest rates rise, albeit slightly, the SRI predicts carriers will start to offer living benefits riders on their star RILA products, making them even more attractive to consumers.
4. Market fluctuations drive people to want fixed-rate deferred annuities
If you know what the phrase “meme stock” means, you know why some clients are fed up with the stock market and just want a reasonable alternative with safe, predictable growth.
Things are happening in the market that have never happened before. Individual investors using trading apps like Robinhood are having a big effect on the market. Often spurred by online discussion groups like r/WallStreetBets and day trader chat rooms, they’re causing unpredictable swings in certain stocks (meme stocks) that also affect the wider market. Their impact has been big enough to change the strategies of institutional block traders.
In January of 2021, members of r/WallStreetBets pumped GameStop's stock price to triple digits, squeezing - and nearly bankrupting - institutional investors who had shorted the company's stock.
What does all of this mean for your clients? It depends who they are. Some like seeing normal people affect the market. Others are terrified by it.
Between the pandemic-driven instability of 2020 and the ongoing instability of 2021 driven by inflation, supply chain issues, and meme-stock trading, fixed-rate annuities are an oasis of calm and predictability.
Fixed-rate deferred annuities are conservative products. They don’t have the bells-and-whistles of RILAs. But there’s something appealing about stability when the world – and the markets – are still seemingly out of whack.
5. Every age group wants guaranteed income products
Here’s the latest from the 2021 BlackRock DC Pulse Survey:
- Overall, 89% of defined contribution (DC) plan participants want a product designed to generate retirement income.
- 94% of millennial DC plan participants want such a product.
- 89% of Gen X DC plan participants want such a product.
- 83% of Baby Boomer plan participants want such a product.
- 75% of retired survey participants said a guaranteed lifetime income product made a bigger difference than they thought it would in terms of their retirement security.
The SECURE Act made it easier for DC plan sponsors to offer annuities through their plan, but rollout and adoption are currently slow. But based on those extremely high percentages of interest, it’s worth bringing up the topic with your clients and showing them how else they can achieve the same end result.
6. Fee-only annuities are an option
If you’re the type of advisor who doesn’t recommend annuities because of what it costs your client, there’s a solution. Fee-only annuities offer your clients an added source of income if they enter retirement during a bear market – without the high cost that makes traditional commission-based annuities too expensive.
No, you won’t earn a commission. Yes, you might need to partner up to make that sale.
As many as 20 carriers offer fee-only annuities.
But if you’re recommending an annuity as part of a comprehensive financial plan, you’re not short on other products or services to sell that client. Plus, that fee-only product proves you’re looking out for their best interests. In many cases, an annuity might be the exact right thing to meet a client’s needs as they enter retirement. Why shun annuities as a whole because some outdated products earned a bad reputation?
That's our look at 6 reasons to talk about annuities in 2021!
To learn more about how annuities fit into your clients' financial plan, give us a call and ask to talk to one of our brokerage managers. They LOVE planning solutions and can help you with advanced case design for clients entering retirement in these strange times.
Are annuities on your list of topics to cover with retiring clients? In your opinion, what are their biggest pros and cons?
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