The COVID-19 pandemic has given people many reasons to be nervous, not least of which being how it has hurt their investments and their ability to retire.
With the stock market plummeting, many investors say they now have a different view on risk. This change in mindset, according to analysts, advisers and insurers, will lead people to consider products they previously wouldn’t have touched. Enter annuities.
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“There’s a flight to safety,” said Sheryl Moore, CEO of Moore Market Intelligence. “If this is anything like things were in 2008 and 2009, we’re actually going to run into issues with the supply and demand of annuities.”
That will favor products like indexed annuities, but much depends on how insurance companies adjust their products in the coming weeks and whether they suspend sales on some annuities, Moore said.
“I would anticipate [that] we’re probably going to have record sales of indexed annuities this year,” she said.
Nearly 30% of investors said they plan to decrease their level of risk as a result of the COVID-19 pandemic, according to a survey commissioned in March by LendingTree’s MagnifyMoney site. Meanwhile, 32% said the pandemic will have no effect on their future investment decisions. An additional 23% said they planned to keep money out of the stock market, and 21% said they would further diversify their portfolios, according to the survey results. That report included responses from more than 1,000 U.S. investors.
For risk-averse investors, annuities can provide peace of mind because of the payments they guarantee. The trade-off, often, is that investors give up at least some of the upside they would see by investing in stocks.
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Demand for products is expected to increase this year, particularly after the pandemic subsides and volatility dampens. But the rates and guarantees that have been selling points for years simply aren’t what they used to be.
“Many of our clients who call in concerned about the markets are asking about annuities. The same clients who just months ago would quote articles on why annuities are the root of all evil have started to enquire,” Charlie Rocco, CEO of financial planning firm Rocco & Associates, said in an email. “Unfortunately, now is not the time to make a change from an investment account over to an annuity.”
Best time to buy
With rates being low, buying an annuity now can have “the same effect as buying high and selling low,” Rocco said. “The best time to secure retirement income using an annuity is at the toughest time to do so, when the markets are high and great returns seem to have no end in sight.”
At the end of 2019, indexed annuities had an average rollup rate for their guaranteed lifetime withdrawal benefits of 6.35% — the highest it had been since 2012, according to data from Moore. Now that rate, which is used to calculate the living benefits base, sits at 5.58%, the data show. Further, the annual performance cap that insurers put on indexed annuities is now at an average of 3.37%, which is the lowest it has been since 2016, according to Moore.
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Companies have also notched down the annual withdrawal rates on products with lifetime guarantees. Those figures are based on the age at which contract holders begin taking payments. If a product previously had an annual payout rate of 5% for life, it might be at about 4% now, for example, Moore said.
For advisers, those indexed annuities are now paying smaller commissions, on average. At the end of 2019, the average commission rate was 5.74%, down from 6.23% a year earlier and 7.62% as far back as 2008, according to Moore.
Amid the market crisis this year, insurers have been “de-risking,” Moore said. That has entailed lowering the roll-up and guarantee rates, raising fees and restricting sales of some products.
A handful of insurers have pulled their lines of fixed annuities entirely. That followed an adjustment the Fed made to its target rate, bringing it to a more-than decade low of zero to 0.25%. That made the holdings insurers use to back their products less effective, at least for the rates customers have sought.
Unlike fixed annuities, indexed annuities do not have a guarantee for the annual yields on the principal base.
One of the larger annuity providers, Allianz Life, has not pulled its products from shelves, though it has adjusted them. On its Core Income 7 fixed indexed annuity, for example, the company increased the product fee to 1.25% from 1.05%, and the rate for its level-payout option dropped by 20 basis points, said Corey Walther, president of Allianz Life Financial Services. But the company has not changed the annual payout increase rates for people who opt for that feature, he said. Customers make the choice for either level or annual increase payout options at the time they take distributions, he noted.
With the stock market teetering and interest rates low, “now more than ever, we really believe that people coming out of this will be much more attuned to risk,” he said.
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“This is such a good reminder that bear markets do happen. Black swans do happen,” Walther said.
As a result, advisers and clients will be working on risk management, he said.
Part of that will include tax considerations, Walther said. The massive size of the current government stimulus package and growing deficit hints that tax rates could go up in the future, he said.
Sales expectations are less than rosy
Last year was a record year for U.S. annuity sales. The products pulled in $241.7 billion in new business, up 3% from $233.7 billion in 2018, according to data from Limra’s Secure Retirement Institute.
Few people seem to have rosy expectations for variable annuity sales this year. Those products — which are often sold with riders that provide guaranteed lifetime withdrawals — hold mutual funds as their underlying investments.
But so-called “buffered” or “structured” annuities could be anexception. Those products, most recently dubbed “registered indexed-linked annuities,” are a subset of VAs that have caps on returns and limitationson performance losses. They have a wider range of returns than the yields available on indexed annuities, making them potentially more suitable for investors who want a higher level of risk.
Buffered annuities sold well last year and were largely responsible for VAs as a whole, having their best sales year since 2008.
“That product category is poised to also do very well coming out of this,” Walther said. Despite the state of the stock market, those annuities currently have performance caps as high as 16%, he said.
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“Why take a risk of investing in the equities market when you still have that level of potential upside?” he said.
But how much business do insurers want?
Another factor that will determine sales volume is how much business insurers want to take on. Over the past decade, companies that provided competitive rates and prices on their VAs saw bursts of new business. Not wanting to issue more contracts than they were comfortable backing, they took steps to limit new sales. That included raising fees, lowering the rates on living benefits or restricting the investment options for contracts with guarantees attached to them.
“When something like this happens so early in the year, they have to play a fine line” of selling enough but also making sure it’s profitable business, Moore said.
In the fixed indexed annuity business, there has been “a very large decrease in the amount of upside potential that a client can earn,” Brian Lipinski, principal at fixed-annuity distributor Simplicity Pittsburgh, said in an email.
“The small list of carriers that are eager to gain distribution have maintained attractive pricing, so we expect these carriers will see increased volume for as long as they have the appetite for the premium.”
As the pandemic slows down, some investors will inevitably be thinking about ways to put a guarantee on their retirement paychecks, advisers said.
“A portfolio shock like many are experiencing today can be eliminated by the proper use of income planning, by using the guarantees provided by some type of annuities,” financial planner Matt Chancey wrote in an email. “Many clients sleep better at night with some type of guaranteed income.”