Fixed index annuity sales are on pace for a record year in 2016 as low interest rates and product features driver their popularity among broker-dealers and in the face of a potential new Labor Department investment-advice regulation that will make sales of these harder. Simultaneously, sales of variable annuities are projected to be their lowest in nearly two decades, continuing their multi-year dip, according to insurance industry group, Limra.
Limra projects indexed annuity sales to hit $62 billion by year-end, which would represent growth of roughly 14% over the record $54.5 billion set in 2015. However, Limra estimates a 21% decrease in variable annuity sales in 2016, to $105 billion from $133 billion last year. That would be the lowest figure since 1998, when variable annuities saw $100 billion in sales.
This is due in part as independent broker-dealers, the largest distribution channel for variable annuities, have started to embrace indexed annuities more.
One reason for the switch may be the risks associated with variable annuities. Variable annuities offer some level of freedom to investors with a higher risk tolerance but have a number of drawbacks that make them poor choices for most investors:
- Because these are long term investments, they are generally illiquid.
- They often come with a number of hidden fees and expenses, including surrender charges, sales charges, tax penalties for early withdrawals, mortality charges, etc.
- They offer fewer tax benefits than the average 401(k)
- Because these are usually high commission paying products, your broker may have an incentive to convince you to buy them, even though they may not be appropriate for you.