Tim Bieber | Photodisc | Getty Images
Amid stock market gyrations, recession fears and loftier payouts, consumers last year pumped a record 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 estimates published by Limra, an insurance industry trade group.
That figure is a 17% increase over the prior record 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 Index ultimately bottomed out with a 57% loss from its peak.
More from Personal Finance:
Why it pays to wait to claim Social Security benefits
Medicare users can still change, drop 2023 Advantage Plans
What is a 'rolling recession' and how does it affect consumers?
Similarly, 2022 saw the post its worst loss since 2008, ending the year down 19.4%. The U.S. Federal Reserve raised interest rates aggressively to quash stubbornly high inflation, fueling anxieties that the central bank would inadvertently tip the nation into recession.
"In ugly times, people get concerned about safety," said Lee Baker, a certified financial planner and founder of Apex Financial Services, based in Atlanta, and a member of CNBC's Advisor Council.
'Unique' confluence of factors drove annuity sales
There are many types of annuities. They generally fall into two categories: an investment or a quasi-pension plan offering a guaranteed level of income for life in retirement.
All annuities are issued by insurance companies, which hedge risks like market volatility or the danger of outliving savings in old age.
Annuities have also benefited from the Fed's cycle of raising interest rates, which has translated to a better return on investment. Meanwhile, U.S. bonds — which typically act as a ballast when stocks fall — suffered their worst year on record in 2022, leaving few options for savers looking for relative safety and a decent return.
"This was a unique year," Todd Giesing, assistant vice president of Limra Annuity Research, said of the factors that combined to drive record annuity sales.
Anything that's protection-based and has some downside protection is doing very well.
Todd Giesing
assistant vice president of Limra Annuity Research
Consumers were especially sanguine about fixed-rate deferred annuities last year. Total sales in that category — $112.1 billion — more than doubled those in 2021 and broke the prior annual record in 2002, when consumers bought $80.8 billion, according to Limra data.
Fixed-rate deferred annuities work like a certificate of deposit offered by a bank. Insurers guarantee a rate of return 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 money into an income stream.
Another category — indexed annuities — captured $79.4 billion, an 8% increase on its 2019 record, Limra said.
Indexed annuities hedge against downside risk. They are tied to a market index like the S&P 500; insurers cap earnings to the upside when the market does well but put a floor on losses if it tanks.
watch now
VIDEO3:4203:42
Consider annuities to cover expenses, says financial advisor
Power Lunch
"Anything that's protection-based and has some downside protection is doing very well," Giesing told CNBC last fall.
Meanwhile, consumers have shied away from variable 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 said.
While it's unlikely that 2022's confluence of factors — such as big stock and bond losses and rapidly rising interest rates — will persist in the near term, demographic trends including baby boomer retirements underpin long-term growth potential for annuity sales, Giesing said. The average buyer is around 63 years old, he said.
How to know if an annuity makes sense for you
Annuities might not make sense for everyone, according to financial advisors.
Advisors often recommend some lesser-used annuity types when building financial plans: a single-premium immediate annuity or a deferred-income annuity.
These are for retirees seeking a guaranteed, pension-like income each month for life. Payouts from immediate annuities start right away, while those from deferred-income annuities start later, perhaps in a retiree's 70s or 80s.
These payments, coupled with other guaranteed sources of income such as Social Security, help ensure a retiree has cash to cover necessities like a mortgage, utilities and food if they live longer than expected and their investments are tapped out or dwindling.
The fancier the annuity, the more the underlying fees are. And a lot of people don't understand the limitations. It's important to know what you're buying.
Carolyn McClanahan
founder of Life Planning Partners
"Am I worried about the client running 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 member of CNBC's Advisor Council, doesn't use single-premium immediate annuities or deferred-income annuities with clients who have more than enough money to live comfortably in retirement.
Annuities become more of a preference for those somewhere in the middle, meaning clients who are likely but not necessarily going to have enough money. For them, it's more of an emotional calculus: Will having more guaranteed income offer peace of mind?
'A lot of people don't understand the limitations'
Asiavision | E+ | Getty Images
Of course, different categories of annuities come with trade-offs.
Single-premium immediate annuities and deferred-income annuities are relatively simple to understand compared with other categories, advisors said. The buyer hands over a lump sum to the insurer, which then guarantees a certain monthly payment to the buyer starting now (an immediate annuity) or later (a deferred-income annuity).
They also offer retirees the biggest bang for their buck relative to other types of annuities, according to advisors and insurance experts.
That's because they don't come with bells and whistles that cost buyers money.
"The fancier the annuity, the more the underlying fees 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 indexed annuities with certain features — known as "guaranteed living benefits" — that give buyers the choice between a lifetime income stream or liquidity (i.e., some of their money back) if they need funds early or no longer want their investment. Those benefit features also generally come with higher costs, as well as restrictions and other fine print that might be difficult for consumers to understand, advisors said.
By contrast, however, consumers can't get back their principal when they buy single-premium immediate annuities or deferred-income annuities. This is one likely reason consumers don't buy them as readily, despite their income efficiency, Giesing said.
Single-premium immediate annuity sales were $9.1 billion in 2022, and consumers bought about $2.1 billion of deferred-income annuities, Limra said. For context, those figures are, respectively, about a 12th and a 53rd of fixed-rate deferred annuity sales.
Protection-focused annuities could make sense for someone five to 10 years away from retirement who can't stomach investment volatility and is willing to pay a slightly higher cost for stability, Baker said.
However, their value proposition may not make sense for all investors at a time when they can now get a return over 4% on safe-haven assets such as shorter-term U.S. Treasury bonds (a 3-month, 1-year and 2-year, for example) if they hold those bonds to maturity, Baker said. However, those Treasury bonds don't guarantee a certain income stream like annuities do.
FAQs
What happens to annuities during a recession? ›
Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable annuities pose much more risk than fixed annuities because their performance is tied to market indexes, which recessions tend to pummel.
What are the fears of risks about annuity? ›Variable annuities are subject to market risk including possible loss of principal. Withdrawals or surrenders may be subject to ordinary income tax and, if made prior to age 59 ½, may be subject to a 10% IRS penalty. Your financial professional can provide costs and complete details.
Do annuity rates go up in a recession? ›Fixed-indexed annuities provide interest rates that vary along with a market index, such as the Nasdaq or S&P 500. During a recession, as the stock price of most companies falls, these indices tend to go down. That means worse returns for the fixed-indexed annuities that are tied to these indices.
Are annuities protected from stock market crash? ›For many retirees, the prospect of an unpredictable stock market is scary. But what happens to your immediate annuity payments if the stock market crashes? The good news is that your payments are protected and guaranteed. Even if the stock market plummets, you will still receive your payments as scheduled.
Can you lose money with annuities? ›You can lose money in an annuity if the insurance company backing it goes bankrupt and defaults on the obligation. Annuity owners can take steps to avoid this, but if it happens, they could potentially lose some of their account value. A level of protection does exist, however.
When should you not buy an annuity? ›You should not buy an annuity if Social Security or pension benefits cover all of your regular expenses, you're in below average health, or you are seeking high risk in your investments.
What is better than an annuity for retirement? ›What are the best alternatives to an annuity? Depending on your strategy for retirement income, alternatives to annuities include bonds, dividend-paying stocks, CDs, retirement income funds and variable life insurance.
What Suze Orman thinks about annuities? ›Are they safe? Suze: I'm not a fan of index annuities. These financial instruments, which are sold by insurance companies, are typically held for a set number of years and pay out based on the performance of an index like the S&P 500.
Will annuity rates rise in 2023? ›“Growth rates in 2022 and into 2023 will be tempered to some extent by rising surrenders as annuitants seek out products with more favorable rates and more attractive features,” according to the report.
Should I buy an annuity now or wait? ›"If the [money for the annuity] purchase is already in cash, buying now or in the next month could provide good value. However, if your pension funds are invested in fixed interest or equities it may pay to wait for [their] prices to recover from recent downturns before cashing out."
How high will annuity rates go in 2022? ›
Latest annuity rates
The 15-year gilt yields increased by +50 basis points to 4.02% during December 2022 with providers of standard annuities increasing rates by an average +3.64% for this month and we would expect rates to rise by +1.36% in the short term if yields remain at current levels.
According to a 2022 report on CNBC, the average immediate annuity payouts increased 11% for men and 13% for women in the first half of 2022. And sales of fixed-rate deferred annuities were up 44% over the same time, according to the insurance industry group LIMRA.
Why should you avoid annuities in retirement? ›There's a high internal “mortality and expense” fee that probably adds up to 1-2%. In the case of the variable annuity, you're most likely subject to terrible investment options that cost another 1% over their index fund counterparts. A big-selling point for annuities comes from a place of fear.
Why do financial advisors push annuities? ›They're largely buying annuities that shield from volatility in stocks and bonds amid broader concerns about recession and the U.S. economy. Financial advisors generally counsel clients to use annuities as a guaranteed income source in retirement.
Are my annuities safe right now? ›Income annuities and fixed annuities are among the safest financial solutions available.
What is the safest annuity company? ›- Our Methodology.
- Best Overall: Lincoln Financial.
- Best Variable Annuity: Nationwide.
- Best Fixed Indexed Annuity: Allianz Life.
- Best Income Annuity: MassMutual.
- Best MYGA: Athene.
- Best for Customizable Contracts: Global Atlantic.
- Best for Low Fees and Premiums: TIAA.
Typically, deferred annuities allow an annuitant to withdrawal money from the annuity each year, called a penalty-free withdrawal. The standard penalty-free withdrawal amount is 10% of the annuity's value annually.
Are annuities still worth it? ›An annuity will provide you with a guaranteed income for life, no matter how long you live. From day one, you'll know how much income you're going to receive each year. Annuities offer certainty – and that may be particularly reassuring if you're worried about the recent volatility in the stock market.
What percentage of retirees have annuities? ›However, according to one survey, a relatively low percentage of retirees — fewer than 15% — make annuity payments part of their retirement income plans.
Should a 70 year old buy an annuity? ›Many financial advisors suggest age 70 to 75 may be the best time to start an income annuity. “The best age to buy an annuity is when you're in your 70s because that often allows you to maximize the payout,” said Anthony Martin, founder and CEO of Choice Mutual Insurance Group.
What does Dave Ramsey say about annuities? ›
According to Dave Ramsey, annuities aren't a good option for most people. And they should not be the default option. According to him, although the promise of a stable income is enticing, 401(k) plans and mutual funds are better investments. However, that's not really the disadvantage of annuities.
What is a better alternative to an annuity? ›If annuities simply aren't right for you, certain alternatives can provide you with fixed income streams in retirement. Consider certificate of deposit accounts, bonds, retirement income funds, dividend stocks or some combination of these savings and investment vehicles.
Is it better to have a 401k or an annuity? ›Another big difference is that an annuity offers a guaranteed payment for as long as you live. That means, at least with most annuities, you can't run out of money. A 401(k), on the other hand, can only give you as much money as you have deposited into it, plus the investment earnings on that money.
Do millionaires use annuities? ›Annuities And The Wealthy
They use annuities for a variety of reasons, including estate planning, tax savings, and more. In this guide, we will discuss some of the most common reasons why high net worth individuals use annuities.
Selling an Annuity May Make Sense for Some People
If your financial circumstances change and you suddenly need money, it can be a useful option. Or, you might have inherited an annuity from the original annuity owner or annuitant. If you don't want to keep the inherited annuity, it may make sense to sell it.
Annuities generally provide you with more income options than those offered through mutual funds. You can take lump-sum or systematic withdrawals, or select from the following income options: Single-life annuity: Offers regular benefit payments for the life of the annuity owner.
What does Suze Orman say about fixed annuities? ›Does Suze Orman like annuities? Orman said she believes “we will come to another harder time financially in the market” and that interest rates will continue to stay low for a long time. So, if you are looking for guaranteed income, you may want to consider an income annuity, she said.
Do people with annuities live longer? ›The Adjuster went on to state in its issue of September 1906: "It is, indeed, a literal fact that annuitants live considerably longer …" That is still true: Depending on one's age at the time of the annuity, annuitants on the average live 2-5 years longer than the general population, according to actuarial tables from ...
Should a 65 year old buy an annuity? ›Annuities can help seniors build tax-deferred savings to handle retirement costs such as healthcare and living expenses. Immediate annuities tend to be the best annuities for seniors because they begin paying out within 12 months of purchase.
What is the best age to take an annuity? ›Most financial advisors will tell you that the best age for starting an income annuity is between 70 and 75, which allows for the maximum payout. However, only you can decide when it's time for a secure, guaranteed stream of income.
Do annuities pay more when interest rates rise? ›
Yes, annuities are based on interest rates. The higher the interest rate, the higher the annuity payments will be.
Are annuities good during high inflation? ›Another benefit of annuities is that they offer some protection against inflation. Inflation can eat away at the purchasing power of your savings, but an annuity can help you keep up with the rising cost of living.
What is the 5 year rule for annuities? ›The Five-Year Rule dictates that the non-spousal beneficiary of a non-qualified annuity must withdraw the entire balance within five years of the owner's death. This rule provides the beneficiary with several options about when to receive the death benefit proceeds.
How can I avoid paying taxes on annuities? ›As long as you do not withdraw your investment gains and keep them in the annuity, they are not taxed. A variable annuity is linked to market performance. If you do not withdraw your earnings from the investments in the annuity, they are tax-deferred until you withdraw them.
Should I put my retirement money in an annuity? ›Typically you should consider an annuity only after you have maxed out other tax-advantaged retirement investment vehicles, such as 401(k) plans and IRAs. If you have additional money to set aside for retirement, an annuity's tax-free growth may make sense - especially if you are in a high-income tax bracket today.
How do financial advisors make money off annuities? ›Annuities: Annuity commissions are generally built into the price of the contract. Commissions usually range anywhere from 1% to 10% of the entire contract amount, depending on the type of annuity. For example, fixed-indexed annuities generally earn advisors a 4% commission.
What is the average commission on an annuity? ›Typical Commissions on Varying Annuity Types:
The commission on a 10-year fixed index annuity ranges from 6 to 8 percent. Commissions on single premium immediate annuities typically range from 1 to 3 percent. Deferred income annuities, also known as longevity annuities, charge commissions of 2 to 4 percent.
Yes, fixed annuities are safe from market fluctuations, but they are not without risk. One of the risks of a fixed annuity is that it may not keep up with inflation. As a result, the payments you receive from a fixed annuity will be worth less and less in real terms.
Why should I avoid annuities? ›Annuities can be a poor investment for many people. The main drawbacks are the long-term contract, loss of control over your investment, low or no interest earned, and high fees.
Where is your money safest during a recession? ›While no investment is guaranteed to be recession-proof, some tend to perform better than others during downturns. These include health care and consumer staples stocks (or funds tracking those sectors), large-cap stocks and income investments.
How secure are annuities? ›
Income annuities and fixed annuities are among the safest financial solutions available. Variable annuities, on the other hand can be volatile as they invest in equities or bonds and therefore their performance is tied to the markets.
What are the dangers of annuities? ›- Illiquidity. With most annuities, you are committed to the contract at the end of the initial "free look" period. ...
- Dying early. ...
- Company risk. ...
- Inflation. ...
- Opportunity cost. ...
- Interest rate risk.
The easiest way to get rich during a recession is to invest as much money into the stock market as you can. When there's a recession, stock market performance declines. Consumers spend less and companies earn less, causing investors to worry.
Should you pay off your house in a recession? ›If you lose your job because of a downturn, you're better off keeping the mortgage open and using your bank balance to not only make monthly payments, but also to buy food and pay utility bills.
Is cash King during a recession? ›It will give them the funds to buy stocks or other assets during the decline. Because of how precious cash can be during times of financial stress, many have said that cash is king. The phrase means that having liquid funds available can be vital because of the flexibility it provides during a crisis.
Why do financial advisors hate annuities? ›Financial planners don't like them for the fees involved
"You're paying a financial advisor their fees on the annuities, and you're also paying an actuary fee for them to do basically those time value of money calculations and life expectancy calculations.