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Interest Rates Are Up . So Is It Time To Buy Annuities ?
Annuities ’ payout rates are higher than they ’ ve been in years . Does that mean they give good relative value ?
By Ben Mattlin
IN FEBRUARY , THE FEDERAL RESERVE RAISED interest rates for the eighth time in the preceding 12 months — and indicated that more rate hikes may be coming .
Consequently , six-month Treasury bonds were yielding slightly less than 5 %, while 10-year Treasurys were just under 3.5 %. But it was fixed annuities that had some clients and advisors excited .
Clients who bought a four-year fixed annuity , for example , could lock in a guaranteed income of 6 % annually without any additional fees , according to Tim Rembowski , vice president at DPL Financial Partners in Louisville , Ky . One year ago , he says , when interest rates were lower , the return on these products was closer to 3 %.
“ Fixed annuities have been a huge bright spot in portfolios ,” says Rembowski . “ We see many advisors and clients who view annuities today as a great buying opportunity .”
But that may not be true for all clients .
Not All Alike
“ It ’ s important to consider what the annuity is expected to do when assessing its attractiveness in relation to interest rates ,” Rembowski acknowledges .
Before buying an annuity , clients and advisors should be “ well educated on the type of annuity they are reviewing ,” says Ara Diloyan , a vice president and financial planner in the private client group at Sentinel Group in Wakefield , Mass . “ Not all annuities work the same .”
Fixed-rate deferred annuities , which are traditional , straightforward , income-producing contracts , have been the big sell- ers lately . In the fourth quarter of 2022 alone , their sales soared 241 % year over year to $ 37.5 billion , as measured by LIMRA ’ s “ U . S . Individual Annuity Sales Survey .” That was the best quarter for these products ever recorded by the Windsor , Conn . - based data tracker . It drove a 22 % year-over-year surge in total annuity sales for the year , to $ 310.6 billion , 17 % higher than the record set in 2008 , according to LIMRA .
The primary reason was rising interest rates . “ Rising interest rates will typically have an immediate impact on fixed annuities , as insurers can quickly modify their crediting rates to reflect the rising rates ,” explains Todd Giesing , assistant vice president of annuity research at LIMRA .
Fixed Vs . Variable Annuities
Fixed annuities pay a contractually guaranteed amount for a specific period of time . They are most directly linked to interest rates .
Variable annuities , on the other hand , invest in mutualfund-like subaccounts that rise and fall with the stock and bond markets . Subaccounts that invest in bonds are more directly impacted by interest rates .
50 | FINANCIAL ADVISOR MAGAZINE | MARCH 2023 WWW . FA-MAG . COM