Annuity Sales Surge 22%
Disenchanted with stock market uncertainty and pulled by the promise of higher payouts given current interest rates, investors are piling into annuities. The insurance trade association LIMRA reported 2022 annuity sales skyrocketed 22% from 2021 to about $310 billion — a new record.
The Fed has been raising rates now for almost a year, which has placed stress on the equity markets. At the same time, annuities have become more attractive.
What’s an Annuity?
An annuity is a contract with a financial institution – usually an insurance company – that provides guaranteed regular payments to an individual over time. An annuity is often used as a retirement income vehicle, as it can provide a steady stream of income guaranteed for a certain period, or for the buyer’s lifetime. Buyers of annuities pay for the contract with a lump sum of money or a series of payments made over time.
There are several different types of annuities available, including fixed annuities, variable annuities, indexed annuities, and immediate annuities. Each type of annuity has its own features and benefits, and may be more suitable for individuals based on their specific financial needs and goals.
Some investors see annuities as a way to profit off this high-rate environment. Immediate and fixed annuities are particularly sensitive to interest rates. With rates on an upward trek in recent months, some investors see an opportunity to lock in a high interest rate. Others find annuities’ promise of guaranteed income compelling, given recent market volatility.
Pros and Cons
There are several reasons people choose to pay into annuities as part of their retirement plan. They guarantee predictable payments and offer tax-deferred growth
The management is also pretty low maintenance. The annuity company uses a formula to figure out how much each payment should be and keep track of account balances. All the investor has to do is pay into the account during the accumulation phase.
Plus, unlike an IRA or 401(k), there is no limit to the amount of money that can be invested into an annuity, and there is no specific age that investors must begin taking payments.
But there are also downsides to be aware of. Annuities are insurance policies, not securities. If the insurance company that sold the annuity goes out of business, the investor will most likely lose their savings. It’s important to research the issuer and make sure it is credible.
Insurance companies often impose fees of 3% or more each year in exchange for the guarantee and other annuity features. Plus, once money is invested in an annuity, it can’t be withdrawn without a penalty.
Inflation can also diminish an annuity’s buying power over time, so check to see if your annuity has built-in inflation protection or the option to purchase it.
Keep in mind that, while their guaranteed floor can provide peace of mind, equity-linked annuities usually come with a cap that limits your upside. So before you buy into an annuity, be sure to weigh the tradeoffs. Avoiding the risks of the stock market brings risks of its own.
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