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Aging Population Increases Annuity Demand Even Though Rates are Low

Logical thinking would tell you that a low interest rate environment would not be a good backdrop for sales of annuities, but annuity products have continued to rise in popularity despite low interest rates. There are multiple reasons for the interest in annuity products lately, including the fact that Baby Boomers are getting older. In the USA Today article, “Annuities gain popularity as Baby Boomers age,” Russ Wiles said that Americans are searching for financial security and avoiding risk when they can. A steadily increasing stock market and low interest rates aren’t normally the factors driving people to annuity products. But overall annuity sales increased by 3% in 2014 according to LIMRA, proving that the products offer value to Americans above just their yield. The article lists three reasons why annuities are increasing in popularity, despite low historical yields.

The first reason is that Baby Boomers are now in the prime age group for purchasing annuities. Most Baby Boomers are now in their mid-50’s and 60’s, the most popular ages to purchase annuity products. The large groups of aging Americans will continue to grow for the next few decades as well. LIMRA estimates that the number of Americans aged 55 and up will increase from 42.5 million in 2011 to 64 million in 2025. This is a large opportunity for insurance companies. It’s not only the fact that there is an increasing number of older Americans that is making annuities popular though. We’re just more risk averse in general after the stock market crash in 2008. The market may be near record heights now, but Americans aren’t willing to take on the risk that they used to be.

Another reason that low interest rates aren’t affecting annuity sales as much is that we’ve likely become accustomed to low interest rates as a nation. They are likely to rise again over time, but it probably won’t be too soon and also won’t be very fast. There’s no reason to wait until rates rise to purchase a fixed rate annuity when you don’t think they’ll rise much anyways and you will lose out on benefits while waiting. Annuity FYI senior vice president Andrew Murdoch says that even when the Federal Reserve increases interest rates, they will be focusing on short term rates that affect credit card interest and money-market yields rather than intermediate term interest rates that affect annuity yields. When those rates eventually rise, insurance companies will be able to offer more generous benefits to consumers, which will continue the boost for annuity products.

Even if you haven’t purchased a private annuity, your Social Security benefits are an annuity product. They aren’t exactly the same, but the main feature of paying you retirement income for as long as you live is the same. Social Security is guaranteed by the government and pays a cost of living increase (COLA) that you would have to pay extra for with an individual annuity. You receive an 8% increase in your monthly payments for each year you delay receiving Social Security payments from when you are eligible until age 70. Many people don’t want to wait for their Social Security payments, but the Center for Retirement Research at Boston College says that this is like buying an annuity from the Social Security Administration and calls it “the best deal in town” while interest rates are low. While you are waiting to receive your Social Security payments, you can purchase an individual annuity that pays for a certain time frame and covers your income while your government annuity grows.

Annuity products remain popular as Baby Boomers get older despite low interest rates in the United States. Americans are shying away from risk and looking for financial security that will carry them through retirement. If you have any questions about using an annuity product to help create retirement income, speak with an expert at Annuity FYI.

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*Guarantees of annuities rely on the financial strength and claims-paying ability of the insurance company that issues them. Lifetime payouts may be a benefit of the base annuity contract, or may be offered through the additional purchase of a lifetime benefit rider.

1. Wiles, Russ. “Annuities gain popularity as Baby Boomers age.” USA Today, August 22, 2015. http://www.usatoday.com/story/money/2015/08/22/annuities-gain-popularity-baby-boomers-age/31486595/

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