Are uninformed buyers making the right decision?
PORTLAND, OR (May 2, 2016) – Bucking conventional wisdom, sales of fixed annuities — paced by unusually robust sales of fixed indexed annuities — posted a six-year high in 2015, despite paying low interest rates, according to data reported by the Insured Retirement Institute (IRI).
At the same time, sales of variable annuities (VAs) – by far the most popular-selling type of annuity – plummeted to $130.4 billion, down 5.5 percent from $137.9 billion in 2014.
Overall, total annuity sales were flat in 2015 at $228.8 billion, nearly unchanged from $229.4 billion in 2014, according to the IRI, continuing a trend of modest annual sales increases in recent years despite the fact that the affluent Baby Boomer generation is retiring in record numbers.
Buyer Beware
What all this shows, according to Annuity FYI, an online informational resource for prospective annuity buyers, is that hesitant buyers may not be taking a sufficiently long-term view in determining which annuity to purchase and, in particular, may not understand important details when buying a fixed indexed annuity (FIA). A FIA is a type of fixed annuity tied to a stock market index that doesn’t decline in value in a weak market and can potentially generate a much higher return than a standard fixed annuity.
Insufficiently informed annuity buyers may be making three key mistakes, said Andrew Murdoch, senior vice president of market research at Annuity FYI.
- They may be bypassing VAs because of concerns about near-term stock market prospects, even though most VA buyers purchase a living benefit rider guaranteeing annual lifetime income.
- While they are properly comparing fixed annuity interest rates to bank CDs, which pay less, they may not be sufficiently analyzing whether low fixed annuity rates will meet their needs over time.
- They may not understand what they truly get – and do not get — when they buy a FIA.
“I am not suggesting that most annuity buyers are actually buying the wrong annuity,” Murdoch says. “What I am suggesting is that, too often, they are buying the annuity they do because that is what is sold, not because it best meets their needs. Many annuity buyers would be better off independently examining what they are considering and carefully choosing among different annuities.
“This is the only way to buy an annuity that truly fits your particular needs,” Murdoch said.
In particular, Murdoch raises questions about the soaring sales of FIAs. FIAs posted record sales of $16.1 billion in the fourth quarter, more than a 32 percent increase from sales of $12.2 billion in the fourth quarter of 2014. These are good products, Murdoch said, but buyers too often confuse their terms.
FIA Buyers May Not Be Getting What They Think
For example, Murdoch said, many FIA buyers think they are getting market-like returns with no risk because FIAs, unlike VAs, don’t decline in value when the market drops. What they often don’t appreciate, however, is that they get sharply reduced market returns. In addition, most people buy a lifetime income benefit with a FIA. FIA buyers often confuse the income withdrawal rate, which is what they actually receive, with the higher “roll-up rate,” which is how much the sum determining their withdrawal rate grows before taking withdrawals.
Murdoch said buyers also tend to be unaware of creative mix-and-match annuity buying strategies that may be better for them. They could, for example, buy a FIA without a lifetime income rider, saving about 1 percent annually, and couple it with the purchase of a no-fee immediate annuity. This way, they maintain some exposure to the market and receive more income from an investment of the same size because an immediate annuity pays higher rates.
“Again, I’m not saying that the purchase of a fixed indexed annuity by itself doesn’t make sense,” Murdoch said. “Some offer living benefits that pay higher income than others – and higher than many other types of annuities as well. But buyers have to do their homework to determine whether they are actually getting a good deal.
“You wouldn’t buy a stock without analyzing the company and comparing the stock to other stocks,” Murdoch added. “Why would you buy an annuity without comparison shopping?”
About Annuity FYI
Annuity FYI, founded in November 2000, is the nation’s leading resource for learning about, comparing and selecting annuities. It offers annuity basics, describes the different types of annuities, and also helps annuity owners evaluate their annuities. In addition, it compares annuity rates, spotlights particularly attractive annuities and publishes informative articles about annuities. It attracts nearly 30,000 unique visitors a month. Learn more at www.annuityfyi.com.
About Insured Retirement Institute
The non-profit Insured Retirement Institute (IRI) is the leading association for the retirement income industry. IRI leads a national consumer coalition of more than 30 organizations and is the only association that represents the entire supply chain of insured retirement strategies. Members are major insurers, asset managers, broker-dealers/distributors and financial professionals. IRI is an advocate for the sustainable retirement solutions Americans need to help achieve a secure and dignified retirement. Learn more at www.irionline.org.
