WHAT IS THE FASTEST GROWING SEGMENT OF THE ANNUITY MARKETPLACE
What segment of the annuity marketplace is the fastest growing?
Have you heard of structured annuities, buffered annuities, registered index-linked annuities or variable index annuities? With so many different names for the same product line it can become confusing but since LIMRA uses registered index-linked annuities (RILAs), I will use it to describe the fastest growing segment in the annuity space and give reasons why sales are accelerating so rapidly.
RILAs entered the marketplace in 2010 to bridge the gap on the efficient frontier between fixed index annuities (FIAs) and variable annuities (VAs). Essentially, these products share in a portion of the downside risk and in returns have a greater upside potential. RILA sales totaled $17.4b in 2019*1, which is up 55% compared to 2018 ($11.2b*2) and growth has continued quarter over quarter. RILAs are helping prop up VA sales that have been declining since their peak in 2007*2 —in the fourth quarter of 2019, registered index-linked annuities accounted for more than 18% of variable annuity sales and 9% of all annuity sales1. Why are these annuities beginning to fly off the shelves?
RILAs continue to grow year over year
There are a few possible reasons for this rapid growth and can be described using the three bears. Fixed index annuities offer complete principal protection but with decreasing rates over the last few quarters have limited upside potential. On the flip side, variable annuities offer complete upside exposure with numerous subaccounts but do not have any principal protection and clients are on the hook for any losses, as well as high annual fees. Therefore, registered index-linked annuities are just right, combining a form of downside protection while allowing a client to generate greater upside potential and most do not have fees.
In 2019, we saw additional carriers enter the space with Athene and Symetra, while Great American launched another unique product. This year are likely to see multiple new players as more carriers jump into the RILA market. We are seeing product enhancements with the addition of participation rates, different types of downside protection and volatility control indices. Overall given the current market conditions, RILAs are positioned to have their best year yet by providing downside protection to turn a recession into a correction while allowing enough upside participation to capture the rebound.
Disclaimers:
When you buy a registered index linked annuity, you own an insurance contract. You are not buying shares of any stock or index. This is not a comprehensive overview of all the relevant features and benefits of registered index linked annuities. Before making a decision to purchase a particular product be sure to review all of the material details about the product and discuss the suitability of the product for your financial planning purposes with a qualified financial professional.
The participation rate on the downside allows for any interest credited on each contract anniversary to be limited to a percentage based off the given downside participation rate. The interest credited is added to the accumulation value of your contract, which then becomes the guaranteed Accumulation Value “floor” that will be included in the calculation of the interest that is credited going forward, subject to any withdrawals and applicable rider fees.
The annual reset sets the index starting point each year at the contract anniversary. This reset feature is beneficial when the index experiences a severe downturn during any given year because not only do you not lose the full accumulation value from the downturn, but the new starting point for future growth calculations is the lower index value.
Although an external index may affect your interest credited, the contract does not directly participate in any equity investments. You are not buying shares in an index. The index value does not include the dividends paid on the equity investments underlying any equity index. These dividends are not reflected in the interest credited to your contract.
Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company and do not apply to the performance of the index, which will fluctuate with market conditions. Annuities are designed to meet long-term needs of retirement income. Annuity contracts typically require money being left in the annuity for a specified period of time, usually referred to as the surrender charge period. If you fully surrender your annuity contract at any time, guaranteed payments provided for in the contract and/or any rider will typically no longer be in force, and you will receive your contract’s cash surrender value. Before purchasing an annuity, read and understand the disclosure document for the early withdrawal charge schedule. The purchase of an annuity is an important financial decision. Talk to your financial professional to learn more about the risks and benefits of annuities.
Please note that in order to provide a recommendation to a client about the liquidation of a securities product, including those within an IRA, 401(k), or other retirement plan, to purchase a fixed or variable annuity or for other similar purposes, you must hold the proper securities registration and be currently affiliated with a broker/dealer or registered investment advisor. If you are unsure whether or not the information you are providing to a client represents general guidance or a specific recommendation to liquidate a security, please contact the individual state securities department in the states in which you conduct business.