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.
1. Rising Popularity of Fixed Index Annuities
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 due to 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.
- Downside protection. Nearing retirement, investors are less likely to risk their savings because they have a shorter time horizon. With 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.
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.
3. Emergence of Registered Index-Linked Annuities
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 that 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.
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.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.
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.
7. Environmental, Social, and Governance 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.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.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.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.
