LIMRA: Why Fixed-Rate Deferred Annuity Sales Tripled in Two Years

Over the past few years, Americans have endured a pandemic, skyrocketing inflation and predictions about a possible recession — all of which would unnerve most investors. During that time, the equities markets experienced double-digit swings — up more than 20% in 2021, losing all of those gains in 2022, and rebounding in 2023. For those approaching retirement, this volatility can be nerve wracking because trying to time the market is frequently unsuccessful and the idea of losing a significant portion of their nest egg would be unsettling.

Yet, with record-high inflation, investors need their assets to grow to maintain their buying power. Until 2022, interest rates were so low that traditional products offering principal protection were not viable for that goal. With the Federal Reserve increasing interest rates to their highest levels in 15 years, recently overlooked products have become very attractive.

Enter Fixed-Rate Deferred Annuities
In January, LIMRA announced preliminary fixed-rate deferred (FRD) annuity sales were $58.5 billion in the fourth quarter, 52% higher than fourth quarter 2022 sales and 10% higher than the total annual FRD annuity sales in 2021.

For the year, FRD annuity sales totaled $164.9 billion, up 46% from the record set in 2022, and more than triple the 2021 sales results ($53.1 billion).

Rising interest rates, continued equity market volatility, competitive FRD annuity crediting rates and a growing demand for products that protect investment principal while offering guaranteed growth helped fuel the tremendous gains in the FRD annuity market.

The increases in interest rates allowed insurers to raise crediting rates for their FRD products and, as a result, the income that consumers could get from annuities, making them more attractive. While CDs offer a similar value proposition — relatively short-term commitment, principal protection and guaranteed rate of return — their rates have not been able to compete with the FRD annuity rates.

Research shows the average crediting rate for a 3-year FRD annuity product has outperformed the average 3-year CD rates, often at least doubling the return. Insurers are able to offer better rates because their underlying investments are more diverse. Banks, the primary seller of CDs, make money on loans (commercial loans, mortgages, and personal loans), where the margins are much smaller. Meanwhile, insurance carriers invest in a mix of corporate and government bonds, stocks, mortgages, real estate and policy loans. These investments are often longer-term and can offer higher returns than bank loans.

Aging Demographics Drove FRD Annuity Market Growth
The U.S. population is aging. There is a lot of attention about the Baby Boomer generation entering retirement and the volume of people turning 65. According to the Retirement Income Institute, more than 4 million Americans turned 65 in 2023 and that trend will continue through 2029.

But what about the tail end of the Baby Boomer generations — those ages 60 to 64? According to Organization for Economic Co-operation and Development data, the number of U.S. people ages 60–64 has doubled to over 21 million since 2000. These are people less likely to have pensions and more likely to rely on Social Security and their savings to fund their future retirement. LIMRA research shows the average age of a FRD annuity buyer is 62 — an age where many people are approaching retirement and wanting to secure a portion of their assets in more conservative investments. Given the economy of the past few years, who wouldn’t consider a product that offers investment protection and guaranteed growth at a higher rate than money market accounts and CDs?

A recent LIMRA study asked investors to select an annuity product that they would prefer to buy based on their financial goals and perceived risks. Of those who said they would choose an FRD product in 2023, safety was a driving force. The top three reasons why an investor said they would select a FRD were:

It is the safest possible option – 66%
I place more value on protecting my savings than seeking maximum gains – 54%
I don’t want my investment to decrease at all – 47%

What’s Ahead for Fixed-Rate Deferred Annuities?
Economic conditions will remain a primary driver of FRD annuity sales growth over the next few years. Currently, equity market volatility has diminished and there is an expectation that interest rates may come down in 2024. Yet, with inflation stubbornly staying above 3%, the Federal Reserve is likely to take a slow approach to adjusting interest rates, which will benefit FRD product sales.

In addition, the vast majority of FRD products (88%) sold over the past few years have been 3-year and 5-year contracts, meaning many contracts will be out of the surrender period in 2024 and 2025. LIMRA research suggests that a large portion of these contracts will be renewed or rolled over into another FRD product and that FRD sales will continue to be much higher than those prior to 2022. As a result, LIMRA is forecasting FRD sales will likely exceed $100 billion in 2024 and 2025. This will be considerably lower than the record set in 2023 but will still double the sales achieved in 2021.