There are a few different factors causing a shift from variable annuities to indexed annuities. Scott Stoltz wrote about the forecasted annuity takeover for Investment News in the article “Why indexed annuities eventually could outsell the variable annuity.” For the article, Raymond James’ fixed and indexed annuity team talked about the changes they’ve seen over the last couple of years in the indexed annuity market. Their indexed annuity sales only made up a small percentage of overall sales back in December 2012. That number increased significantly by December of 2015 and took an even bigger jump in January of this year. During the same time, variable annuity sales have mostly remained flat, with some small declines here and there. Variable annuity sales typically follow the markets; they are higher when the markets perform well and lower during down markets. This relationship has let up a bit though which suggests that more than just the markets are a factor in higher indexed annuity sales and lower variable annuity sales.
One of the main reasons for increasing indexed annuity sales is that the products have become more consumer friendly over the past few years. At the end of 2012, indexed annuity sales were $33.9 billion. There’s a good possibility that 2015 sales will be around $55 billion once the final results are tallied. It used to be the norm for indexed annuity products to have commissions above 10% and surrender periods of 15 years. Current surrender periods are down to 7 or 8 years, a change that benefits consumers. The average commission at Raymond James is now 4.1%. Big annuity carriers have also been entering and reentering the indexed annuity market over the past couple of years. That has increased competition, making products more desirable for consumers. But it has also given more credibility to the indexed annuity market and increased the marketing by wholesalers who used to be against the products. Some of the most recent additions to the indexed annuity market were Pacific Life, Nationwide, AIG and Lincoln Financial. Expect more companies to follow suit, especially those who have had a strong focus on variable annuity products.
Companies selling variable annuity products also made a lot of decisions that actually turned more consumers toward indexed annuities. First of all, they shifted the variable annuity focus away from a tax-deferred investment to one offering guaranteed lifetime income protection. They also took away a lot of the investment options from their variable annuities in order to protect the insurer from their potential risks. Jackson National was one of the only companies that kept their investment flexibility. By making their products much more similar to an indexed annuity, they lost their value when compared to actual indexed annuities. Insurers also placed a lot of limits on their new and existing variable annuities and many companies offered buyouts to their customers as well. Unfortunately it was kind of a catch 22 for insurance companies because they were trying to protect themselves while still offering valuable products to consumers. But in the process, variable annuity products just became less desirable.
The markets really dictated these variable annuity changes and insurance companies didn’t necessarily have anything else they could do about it. A consistent low interest rate environment made it impossible for insurers to offer the same products, but of course that would lead to changes in demand. There has also been a shift in demographics that is sending more people to indexed annuity products for their benefits. Baby Boomers just aren’t willing to take on the risk that earlier generations were because of the market downfalls they have seen. Rather than be subject to market declines, they would prefer a product like an indexed annuity where you will not lose money and you are likely to see a 3-4% return each year. Indexed annuities also provide the highest level of guaranteed income and allow investors to retain the liquidity they are looking for. If these things continue, indexed annuity products are likely to continue their increasing popularity.
Variable annuities still have a place in the market though. They are returning to their roots and being used as a tax-deferred investment that offers a guarantee upon death. They’re moving away from a focus on living benefits as indexed annuity products just become a more consumer friendly option. As the demand for indexed annuities continues its steady increase, indexed annuity sales just might surpass variable annuity sales in the future.
Written by Rachel Summit