Even as stocks roared and yields on fixed-income investments climbed in 2023, investors still piled into annuities. In fact, it was another record year for the insurance products, with sales totaling $385 billion in 2023, 23% higher than the record set in 2022, according to Limra , an insurance industry trade group. Attractive interest rates helped drive sales, said Bryan Hodgens, Limra’s head of distribution research and annuities research. Fixed-rate deferred annuities, which earn a set rate of interest for a specified period of time, raked in $164.9 billion last year, up 46% from 2022. Fixed indexed annuity sales brought in a record $95.6 billion, up from 20% from the record hit the year prior. Indexed annuities earn interest that is calculated based on the changes within a market index, such as the S & P 500 or the Nasdaq 100. Buyers aren’t directly investing in the actual market. Contract holders are subject to participation rates and cap rates – which limit how much upside can be captured. However, they also receive downside protection: They are credited zero interest if the index their annuity is tracking declines. “You cannot lose any money in them if the index was to go down,” explained Hodgens. Understanding indexed annuities Buyers can earn interest that’s linked to an index’s performance within a specified period of time, known as the crediting period. The most common is the annual point-to-point, or on the annual anniversary date. The term of index annuities typically range from three to 15 years, according to Annuity.org . However, it doesn’t mean that the interest buyers receive reflects the index’s full gain. Typically, there is a limit to the upside, Hodges explained. Most have a cap, which is determined by the contract. For instance, the S & P 500 may gain 10% during the crediting period, but the investor may just get 5% if that is the cap on their contract. However, if the index just gains 3%, then that is reflected in the amount credited. When the next crediting period begins, the insurance company can lower or raise the cap rate. There can also be a participation rate, which is the percentage of the gains tied to the index that the buyer would realize. If it is a 50% participation rate on an index that gained 10%, the buyer would get 5%. Here are some of the top fixed indexed annuities — both five-year terms and seven-year terms —from insurers with an AM Best credit rating of A- or higher, according to research by Cannex . They are based on the most common indexed-linked strategy that incorporates the S & P 500, have an annual point-to-point crediting method, are commission based and have a 100% participation rate. Each has a guaranteed period of one year. Products with the highest cap rates come with an extra fee. Cannex used Connecticut, with a premium of $100,000, in its database search to find a representation of what is available. Insurance products, including annuities, are state regulated, so what’s available can differ from one state to another. Is it the right move? A fixed indexed annuity may make sense for someone who has no ability or desire to weather market risk, but is looking for returns that are better than traditional bank products, said Melody Evans, a wealth management advisor for TIAA. “Most fixed indexed annuities also have surrender charges, so in addition to being ultra conservative, it is for an investor who has 5-10 years before they need to access those funds,” she explained. A surrender charge is a fee a contract holder pays for withdrawing money from the annuity before a set period of time. There can also be riders that can cost extra money, and there are fees and/or commissions to consider. “When we ask an insurance company to absorb a risk (in this case the risk of market loss), they aren’t going to do that for free. Make sure those fees are worth it,” Evans said. Fixed indexed annuities can also be complicated, warned David Blanchett, head of retirement research for PGIM DC Solutions. “It’s much harder to compare them and understand what you’re buying,” he said. “Being aware of the provisions in the contract — How long do I have to stay in it? What are the restrictions on access? — that’s important to know.” Buyers should also be aware of potential “teaser rates” that incentivize buyers and then drop significantly, he said. “You’re not going to lose money, which is really nice, but you’re probably not going to make a lot of money. And I worry that a lot of times the likelihood of making money is overstated,” Blanchett said. He suggests sticking with a larger insurer over one that is lesser known. Blanchett prefers multiyear guaranteed annuities, which have a rate of interest that is guaranteed over the duration of the contract. “I know what I’m going to get, there’s no uncertainty,” he said. “With the FIA, though, you get this cap on the market and the market goes up, and then the cap changes every year.” Single premium immediate annuities and deferred income annuities are also “safe places to start,” he said. So-called SPIAs involve a buyer putting down one lump-sum premium and receiving a series of payments that typically begins in about a year. Meanwhile, DIAs pay a stream of income at a distant future date, perhaps to supplement retirement income. Evans suggests spending time considering what you need to do with the money. If you are accumulating money for a goal in the future, an indexed annuity can give you the prospect of growth without weathering the market negatives, she said. However, if you need income to cover a certain period of time, then consider an annuity that has a fixed payout for that time period. “If you need income for life, go with a single or joint-life annuity with a clearly illustrated payout,” she said.
