Record Sales of Annuities Last Year Outstrip 2008 Financial Crisis Figures, Driven by Fear and Higher Rates

Americans invested $310.6 billion in annuities in 2022, according to LIMRA, a trade group in the insurance industry. This number marks a 17% increase from the previous record set in 2008 when $265 billion of annuities were purchased during the Great Recession. During that year, the S&P 500 Index dropped 57% from its peak, leading consumers to look elsewhere for financial stability.

The year 2022 saw the S&P 500 suffer its worst loss since 2008, ending the year with a 19.4% decline. The aggressive interest rate hikes by the U.S. Federal Reserve to combat high inflation led to concerns of a potential recession.

Annuities, issued by insurance companies to hedge risks such as market volatility and the risk of outliving savings in old age, saw a boost in sales due to the combination of several factors.

Annuities come in various forms and can serve as either an investment or a quasi-pension plan offering a guaranteed income for life during retirement. The Fed’s interest rate hikes also translated to better returns on investment for annuities. On the other hand, bonds, which usually provide stability during a stock market decline, experienced their worst year on record in 2022. This left limited options for those seeking safety and a decent return.

Consumers showed a strong preference for fixed-rate deferred annuities in 2022, with total sales in this category reaching $112.1 billion. This is more than double the sales in 2021 and broke the previous annual record of $80.8 billion in 2002, according to LIMRA data.

Fixed-rate deferred annuities function like certificates of deposit offered by banks. Insurers guarantee a set rate of return over a specified period, ranging from three to five years. At the end of the term, consumers have the option to retrieve their funds, roll them into another annuity, or convert them into an income stream.

Another category, indexed annuities, attracted $79.4 billion in sales, an 8% increase from its record in 2019, LIMRA reported. Indexed annuities protect against downside risk by being tied to a market index such as the S&P 500. The earnings are capped when the market performs well, but there is a guaranteed minimum in the case of market decline.

On the other hand, variable annuities, whose performance is directly tied to the stock market, saw annual sales of $61.7 billion, the lowest since 1995.

Despite the unlikely persistence of the factors that contributed to the record sales in 2022, long-term growth potential remains due to demographic trends. Since the average buyer is around 63 years old, this includes baby boomer retirements, said Giesing. Financial advisors recommend annuities, specifically single-premium immediate annuities or deferred-income annuities, for retirees seeking a guaranteed monthly income for life, complementing other guaranteed sources of income like Social Security.

According to Carolyn McClanahan — a certified financial planner and founder of Life Planning Partners in Jacksonville, Florida — it’s best to consider annuities when there is a concern of running out of money in retirement. However, she doesn’t recommend single-premium immediate annuities or deferred-income annuities for clients who have enough money to live comfortably in retirement.

According to advisors and insurance experts, single-premium immediate annuities and deferred-income annuities offer retirees a good value compared to other types of annuities. They’re relatively straightforward as the buyer pays a lump sum to the insurer, who then guarantees a monthly payment, either starting immediately or at a later date. Unlike other annuities with additional features, these two types don’t come with extra costs and their fees are lower. As McClanahan advises, it is crucial to understand what you’re buying and to be aware of the limitations of more complex annuities.

Different categories of annuities have different trade-offs to consider.

For instance, variable and indexed annuities with guaranteed living benefits may offer either a lifetime income stream or liquidity. That said, they also come with higher costs and complex terms that can be difficult to understand. On the other hand, single-premium immediate annuities and deferred-income annuities provide high-income efficiency. However, once the lump sum is handed over, the principal cannot be regained. This is a potential reason why they aren’t as popular, as noted by Giesing.

According to LIMRA, single-premium immediate annuity sales were $9.1 billion in 2022, while deferred-income annuity sales were $2.1 billion. In comparison, fixed-rate deferred annuity sales were significantly higher.

According to Lee Baker — a certified financial planner and the founder of Apex Financial Services in Atlanta — protection-focused annuities might be appropriate for someone approaching retirement who is risk-averse and willing to pay a slightly higher cost for stability. However, this option may not be suitable for all investors. After all, you may be able to get a return over 4% from safe-haven assets, such as short-term U.S. Treasury bonds, that offer a guaranteed return but not a guaranteed income stream like annuities do.