Types of Annuities
Every month we’ll aim to blog on a different annuity topic. These posts will be some fact and some opinion based on how we perceive the retirement annuity market. As with any investment “prediction”, take it for what it’s worth.
Over the past few years, the demand for annuity insurance has grown, as it continues to be a valuable option in one’s long term portfolio. While the demand for annuities, as with all investments slowed at times of the recession, the demand for fixed annuities grew as a percentage in the total money invested in annuities. Intuitively this is easy to understand why. With the stock market decreasing and becoming very volatile, the safety of fixed annuities, which aren’t tied to the stock market, a relatively more appealing option. As well, the fixed rate of return offered by fixed annuities became more appealing compared to the investment alternatives. This is fueled by the extremely low interest rates, which are linked to the returns one can receive from other similar low risk investments such as CD’s, and government bonds.
In our estimation the years to come (2010 and 2011) will see a similar growth in equity indexed annuities and when an available option, more investors will choose an immediate annuity payout, versus deferred payments. Of course, predictions are a tough thing to do in the world of investing, and few people would argue that the stock market could go either way in the next couple years. However, it’s exactly this increased volatility and uncertainty which we believe will lead to the aforementioned changes in annuity investor spending.
Just a reminder, or for those still learning the basics, equity indexed annuities are a hybrid of fixed and variable investment types. Linked to common stock market indices (usually the S and P 500), they offer more risk and reward than a fixed annuity. If the index grows, so does your payout. However, they offer more safety than a straightforward variable option. If the index declines, you’re protected against losses with a modest baseline rate. In between the risk of fixed and variable annuities, they allow you to invest in the market without risking your principle.
The term immediate annuity simply relates to the payment schedule – where the investor starts receiving payouts right away versus deferring them sometime into the future.
Moving forward there are of course a number of doomsday theories, and a number of “everything is back to normal” theories. Personally I predict the next few years will be somewhere in between. While the next few years will be volatile and not be without its share of ups and downs, many experts are predicting a slight increase in the stock market over the next few years as things start to recover.
The increased volatility moving forward and positive outlook justifies more investors looking towards an equity indexed annuity. Of course, anyone set for retirement, and looking for a low risk investment should stick to fixed annuities. However, for those willing to take a risk on the recovering economy equity indexed annuities provide the opportunity to participate, without the full blown risk of losing a significant portion due to another stock market crash. These hybrids often come with a fixed rate option, in which you can lock in your fixed rate, if the market looks like it will take another dive. The fixed option is a security benefit of some annuities, and therefore, you should ensure that this option is available on whatever investment you choose.
Choosing an immediate annuity also makes sense, as it lowers your risk, as you continue to be paid back parts of your investment starting now rather than later.
All factors considered, I believe investments in annuities will continue to grow in the upcoming years as the percentage of retirement age citizens grows, and annuities continue to offer a wide variety of options and protection in a volatile economy. Inside annuity purchases, I believe we will start to see the hybrid equity indexed annuities grow as a percentage of overall industry.