Annuity sales jumped 26% in 2024, driven by a growing need for guaranteed retirement income as millions retire. Returns are solid, with fixed annuities offering 5% to 7% and variable 6% to 8%. However, upcoming government policies could impact future performance.
Annuities are flying off the shelves these days, with sales up 26% year over year in the second quarter of 2024 (at $109.9 billion), LIMRA reports. LIMRA also notes that product sales were up 20% for the first half of 2024, as total sales rose to $216.6 billion.
With millions of Americans heading into retirement (11,200 US citizens turn 65 each day in 2024), developing reliable income channels for one’s golden years is a big priority—and one that annuities accommodate.
“The U.S. annuity market continues to break sales records as the need for guaranteed retirement income grows,” said Bryan Hodgens, senior vice president and head of LIMRA research. “In addition, favorable economic conditions, product innovation and the number of Americans turning 65 (PEAK65) have expanded financial professionals’ interest in talking about these products to their clients. As a result, annuity sales have experienced 15 consecutive quarters of strong growth, and LIMRA is forecasting record sales in 2024.”
Annuity Returns Increase, but Concerns About Government Policy Persist
Annuity returns are expected to remain strong in 2024, depending on the specific asset vehicle selected. Fixed annuities provide returns ranging from 5% to 7%, while variable annuities offer returns between 6% and 8% for retirement investors.
Yet, with a U.S. election imminent and public policy on the front burner in the last quarter of 2024, insurance industry insiders wonder what government policies, at both the federal and state levels, will impact annuities when the political dust settles in 2025.
It’s a fair question that’s not easy to answer, annuity experts say. Let’s take a closer look.
Key Government Impactors
The government’s impact on annuity returns is significant, some seen and some unseen. Factors such as regulatory costs, taxes and interest rates, among other things, are just a few impacts the government may have on your annuity returns.
Regulatory Costs and Interest Rates
“Annuities are heavily regulated, particularly in these key areas,” says Jeffrey K. Dellinger, FSA, President of Longevity Risk Management Corporation in Fort Wayne, IN.
With the Federal Reserve recently chopping its benchmark Fed Funds rate by 0.50%, all eyes are on rates going forward – and the annuity industry is no exception.
“The Federal Reserve’s monetary policy decisions, particularly regarding interest rates, have the most direct impact on annuity returns, especially fixed annuities,” says Shawn Plummer, a chartered retirement planning counselor and founder of The Annuity Expert in Atlanta, GA.
When interest rates are high, insurers can invest in higher-yielding assets, enabling them to offer better returns on annuities. “Conversely, low-interest-rate environments, such as those seen over the past decade, limit the potential returns on new fixed annuity contracts,” Plummer says.
In recent years, Federal Reserve policies have led to a more volatile interest rate environment, which shapes the industry outlook on annuity products. “As rates began to rise from historic lows, insurers have adapted by offering products that can benefit from rate hikes, such as multi-year guaranteed annuities (MYGAs) and indexed annuities,” Plummer notes.
Regulatory Changes
Policies like the slow-walked Department of Labor’s Fiduciary Rule also reshape the annuity landscape.
“The rule seeks to ensure that financial advisors act in their clients’ best interests, particularly when dealing with retirement accounts,” Plummer says. “It’s already increased scrutiny on the sale of annuities, particularly variable and indexed annuities, which tend to be more complex.”
Although parts of the rule were recently vacated in court and the rule launch date delayed, the larger rule sections are expected to remain in place. “The ongoing discussion around fiduciary standards continues to shape how annuities are marketed and sold, influencing product innovation and pricing structures,” Plummer adds.
The Stock Market
Most of the volatility in annuities that are registered securities products is attributable to the stock market, not the bond market. “When fiscal and monetary policy is used to slow the economy, the same annuities perform poorly, which both hurts insurance company earnings and reduces future annuity sales,” Dellinger says.
Additionally, the significant fiscal stimulus packages of the 2020s provided loads of additional money in savings accounts, which aided annuity returns. “They were then used to purchase consumer goods, which went very well for the stock market,” Dellinger adds. “The Federal Reserve lowering interest rates is doing the same from a monetary stimulus standpoint. Those policies are certainly having a positive impact on annuities today.”
Taxes
Tax regimes can also play a big part in annuity sales, though not necessarily on annuity returns. “For example, in the 1980s, some competing alternative investments that previously received preferential tax treatment went by the wayside,” Dellinger notes. “This and a 20-year bull market propelled variable annuity sales.”
Other factors, such as foreign exchange rates, play only a minor role in annuity returns—and then “only for those annuity policyholders with returns tied to international stock or bond funds,” Dellinger adds.
Consumer Tips in a Dynamic Annuity Environment
With public policy on annuities uncertain until 2025, what steps can annuity holders take to optimize their returns? Industry experts suggest that the fundamental strategies remain unchanged.
Below are important strategies to keep in mind:
Stay on Top of Performance
“People should be asking about how their annuity is performing, whether it still aligns with their financial goals, and if any adjustments are needed in response to changing market conditions,” says Cliff Ambrose, FRC, founder and wealth manager at Apex Wealth. “It’s also important to inquire about fees, as they can eat into returns over time.”
What’s the Economy Doing?
Understanding how the economic environment might affect their annuity is also crucial to making informed decisions. “In an increasingly volatile economic climate, annuity holders should focus on ensuring they are getting the best possible returns and service,” Ambrose noted. “It’s always a good idea to review the terms of their annuity regularly and make sure it’s still a good fit for their long-term plans.”
Explore Different Annuity Types for Enhanced Stability
It’s also worth exploring different types of annuities, such as fixed or indexed, to see if a change could offer more stability or growth potential, Ambrose says. “Staying informed and having regular check-ins with your provider can help ensure you’re maximizing your annuity’s performance in uncertain times,” he adds.
Go the RILA Route
Annuity consumers should ask if their annuities should be deemed a registered index-linked annuity (RILA).
“Annuity owners could achieve this either via tax-free exchange of an existing annuity or purchase of a new one,” Dellinger advises. “RILAs offer some degree of stock market participation with reduced downside risk. Exactly how the downside risk works depends on whether they prefer a ‘buffered’ or ‘floor’ RILA design.”
Because the more standard version of RILAs can result in some level of account value loss, RILAs “can offer more upside participation than their predecessor, the equity-indexed annuity (now known as a fixed index annuity), which provided complete downside protection,” Dellinger adds.
Editor Norah Layne contributed to this article.