Annuity sales hit record last year, eclipsing sales during 2008 financial crisis amid fear, higher rates

Amid stock market gyrations, recession fears and loftier payouts, consumers last year pumped a catalogue sum of money into annuities, a type of insurance that offers a guaranteed income stream.

Buyers funneled $310.6 billion into annuities in 2022, according to evaluates published by Limra, an insurance industry trade group.

That figure is a 17% increase over the prior secretly set in 2008, when consumers purchased $265 billion of annuities. That year, the U.S. was in the throes of the Great Recession and the S&P 500 Factor ultimately bottomed out with a 57% loss from its peak.

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Similarly, 2022 saw the S&P 500 post its worst loss since 2008, ending the year down 19.4%. The U.S. Federal Reservation raised interest rates aggressively to quash stubbornly high inflation, fueling anxieties that the central bank would inadvertently tip the state into recession.

“In ugly times, people get concerned about safety,” said Lee Baker, a certified financial planner and trip of Apex Financial Services, based in Atlanta, and a member of CNBC’s Advisor Council.

There are many types of annuities. They generally fall into two categories: an investment or a quasi-pension propose offering a guaranteed level of income for life in retirement.

All annuities are issued by insurance companies, which hedge imperils like market volatility or the danger of outliving savings in old age.

Annuities have also benefited from the Fed’s cycle of frame interest rates, which has translated to a better return on investment. Meanwhile, U.S. bonds — which typically act as a ballast when creators fall — suffered their worst year on record in 2022, leaving few options for savers looking for relative cover and a decent return.

“This was a unique year,” Todd Giesing, assistant vice president of Limra Annuity Scrutiny, said of the factors that combined to drive record annuity sales.

Consumers were mainly sanguine about fixed-rate deferred annuities last year. Total sales in that category — $112.1 billion — numerous than doubled those in 2021 and broke the prior annual record in 2002, when consumers bought $80.8 billion, according to Limra figures.

Fixed-rate deferred annuities work like a certificate of deposit offered by a bank. Insurers guarantee a rate of revert over a set period, maybe three or five years. At the end of the term, buyers can get their money back, roll it into another annuity or convert their filthy lucre into an income stream.

Another category — indexed annuities — captured $79.4 billion, an 8% increase on its 2019 single, Limra said.

Indexed annuities hedge against downside risk. They are tied to a market index get a kick out of the S&P 500; insurers cap earnings to the upside when the market does well but put a floor on losses if it tanks.

“Anything that’s protection-based and has some downside keeping is doing very well,” Giesing told CNBC last fall.

Meanwhile, consumers have shied away from capricious annuities, the performance of which is generally tied directly to the stock market. Annual sales of $61.7 billion were the lowest since 1995 for those annuities, Limra remarked.

While it’s unlikely that 2022’s confluence of factors — such as big stock and bond losses and rapidly rising relaxation rates — will persist in the near term, demographic trends including baby boomer retirements underpin long-term intumescence potential for annuity sales, Giesing said. The average buyer is around 63 years old, he said.

Annuities might not make sense for everyone, according to financial advisors.

Advisors often recommend some lesser-used annuity kinds when building financial plans: a single-premium immediate annuity or a deferred-income annuity.

These are for retirees seeking a pledged, pension-like income each month for life. Payouts from immediate annuities start right away, while those from deferred-income annuities start later, dialect mayhap in a retiree’s 70s or 80s.

These payments, coupled with other guaranteed sources of income such as Social Security, workers ensure a retiree has cash to cover necessities like a mortgage, utilities and food if they live longer than count oned and their investments are tapped out or dwindling.

“Am I worried about the client tournament out of money? If yes, that’s when I think about an annuity,” Carolyn McClanahan, a CFP and founder of Life Planning Partners, based in Jacksonville, Florida, has told CNBC.

McClanahan, a associate of CNBC’s Advisor Council, doesn’t use single-premium immediate annuities or deferred-income annuities with clients who have profuse than enough money to live comfortably in retirement.

Annuities become more of a preference for those somewhere in the midriff, meaning clients who are likely but not necessarily going to have enough money. For them, it’s more of an emotional calculus: Hand down having more guaranteed income offer peace of mind?

Of course, different categories of annuities come with trade-offs.

Single-premium immediate annuities and deferred-income annuities are extent simple to understand compared with other categories, advisors said. The buyer hands over a lump sum to the insurer, which then ensures a certain monthly payment to the buyer starting now (an immediate annuity) or later (a deferred-income annuity).

They also put up retirees the biggest bang for their buck relative to other types of annuities, according to advisors and insurance boffins.

That’s because they don’t come with bells and whistles that cost buyers money.

“The fancier the annuity, the more the underlying damages are,” McClanahan said. “And a lot of people don’t understand the limitations. It’s important to know what you’re buying.”

For example, consumers can buy variable and listed annuities with certain features — known as “guaranteed living benefits” — that give buyers the select between a lifetime income stream or liquidity (i.e., some of their money back) if they need funds original or no longer want their investment. Those benefit features also generally come with higher set someone backs, as well as restrictions and other fine print that might be difficult for consumers to understand, advisors said.

By deviate from, however, consumers can’t get back their principal when they buy single-premium immediate annuities or deferred-income annuities. This is one undoubtedly reason consumers don’t buy them as readily, despite their income efficiency, Giesing said.

Single-premium immediate annuity transaction marked downs were $9.1 billion in 2022, and consumers bought about $2.1 billion of deferred-income annuities, Limra foretold. For context, those figures are, respectively, about a 12th and a 53rd of fixed-rate deferred annuity sales.

Protection-focused annuities could survive sense for someone five to 10 years away from retirement who can’t stomach investment volatility and is willing to pay a shed weight higher cost for stability, Baker said.

However, their value proposition may not make sense for all investors at a interval when they can now get a return over 4% on safe-haven assets such as shorter-term U.S. Treasury bonds (a 3-month, and , for pattern) if they hold those bonds to maturity, Baker said. However, those Treasury bonds don’t guarantee a sure income stream like annuities do.