Investors typically look for the strength of returns and as little risk as possible when considering new investments. Yet with an unpredictable stock market, many are moving away from Wall Street and looking toward the annuity industry instead.
The most popular products for investors right now are variable annuities, but fixed annuities are becoming more common as well. They attract buyers because of the way they perform in down markets.
This means that when everything else depreciates, a fixed annuity will remain the same, no matter what happens with outside factors. Plus, immediate annuities begin their payout within 30 days.
Experts predict that some recent trends may boost fixed annuities even further in the coming years, according to USA Today.
The market for this particular product is already rapidly expanding and growing. In fact, sales of fixed annuities have risen by about 25% to $48 billion, says a report by the Insured Retirement Institute. This means that those annuities are currently making up more than one-fifth of total annuity sales. Also reported in a survey is the fact that about half of annuity distributors say that they believe that percentage will grow quickly in the coming months.
Fixed annuities have been attractive for quite some time to numerous buyers, but are only recently gaining more popularity. They don’t depend on the overall stock market, and the idea of having a lifetime income in addition to protecting loss of principal investments is a plus. However, there are also numerous insurance products linked to annuities which protect against falling markets in general, which reduces much of the risk involved with investing.
There are certain challenges that come with investing in these annuities, of course. They can often be “complex and difficult to understand,” so much so that many distributors have actually created programs to train and review processes for advisers. This allows them to know and understand the products they’re selling, and as more than half of all distributors rely on wholesalers to support sales, this is important to the health of the industry.
This begs the question: if financial advisers can’t understand the complexities, how do investors begin to understand?
The other thing buyers need to take into account with these annuities is surrender charges. If the buyer changes their mind when the markets recover, they’re charged, and currently, eight of 10 distributors stretch those out over a decade. It’s an improvement, said industry officials, over the 20-year period it used to be, but a decade is still quite a while for charges.
The perception of fixed annuities is the last issue to touch on. Many believe they are a fixed income substitute, which is not true, considering the fact that there is still a bit of risk to them. While they hold a much lower risk that stocks, they are still not a consistent enough substitute for income.
However, more than half of potential investors said that the annuity would be a substitute for them. The major factor for many others though, was the protection against the loss of the principle.
Because of their increased popularity, distributors such as Penn Mutual have actually come up with more options for annuities. Penn Mutual recently announced two new annuity options to their portfolio, in fact.
Though they are less risky than the stock market, advisers say buyers should exercise caution with annuities and take the time to fully understand how they work before purchasing them. Many buyers jump on the attractive pieces of the offer without fully understanding their commitment.