Page 16 - Investment Advisor February/March 2023

ANNUITIES UPDATE

9 Factors That Drive Annuity Purchase Decisions
A new analysis published by LIMRA shows the reasons why is fixed indexed annuities, which were first introduced in the
investors choose to purchase annuities vary widely, and there 1990s. These products provide the annuitant with principal
does not seem to be one standout reason cited by a majority of protection and some upside potential. In late 2022, some
survey respondents. As the report explains, the decision to buy big life insurers are unveiling registered index-linked variable
an annuity (or not) can be a complex one, as is the decision annuities, or products that provide a limited buffer against
regarding which type of product to buy from which carrier. decreases in the value of the premiums fed into a contract.
According to the data, what is important to annuity
buyers varies significantly based on an investor’s age and life 5. One in 10 point to an advisor recommendation: LIMRA’s
stage. “Understanding the mindset of recent annuity buyers can survey shows 11% of annuity purchasers based their
help the industry improve its products and services,” the report decision on the recommendation of a financial advisor. Experts
suggests. These are the highlights from LIMRA’s latest survey: say the emergence of commission-free annuities and scalable
platforms to distribute them has meaningfully changed the
1. One in four choose based on liquidity: According to annuity landscape for fiduciary financial advisors.
LIMRA, some 25% of investors say they based their annuity
purchase or purchases on the fact that the product allows 6. Fewer than one in 10 cite tax-deferred growth: LIMRA’s
them to retain access to the account value. In many cases, survey shows 8% of purchasers based their decision around
individuals have to pay an additional fee to maintain this the opportunity to achieve tax-deferred growth. One of the
liquidity. LIMRA’s researchers urge advisory professionals to main tax advantages of annuities is that they allow invest-
discuss this liquidity premium with their clients and explore ments to grow tax-free until the funds are withdrawn —
the dynamics that influence annuity pricing. including dividends, interest and capital gains, all of which
may be fully reinvested while they remain in the annuity.
2. 15% cite interest rates: At a time when interest rates are
rising as rapidly as they ever have before, about one out of 7. Just 6% point to the strength of the issuer: According
seven annuity purchasers made their decision based on the to LIMRA, 6% of annuity purchasers decided to buy an
interest rate environment and the product’s projected return, annuity because of the financial strength and reputation of
according to LIMRA. Historically, fixed annuity sales in par- the issuer. The big, well-known life insurers that back many
ticular have been highly correlated with 10-year Treasury clients’ life insurance policies and annuities are getting high
rates, such that higher rates have always led to higher fixed grades from rating analysts at S&P Global. In fact, the U.S. life
annuity sales. insurance sector is one of the most highly rated sectors the
firm tracks, with 91% of the rated companies in the AA or A
3. Nearly one in seven point to delayed annuitization: rating categories.
LIMRA’s data shows 15% made their purchase so that they
could access a product that allows them to later annuitize 8. 4% cite fee-free withdrawals: LIMRA’s analysis finds
the contract and receive guaranteed income for life. One just 4% of investors made their decision to buy an annuity
key trend in the annuity marketplace is the emergence of because of a product feature that would allow them to make
annuity solutions that leverage income riders in the place of withdrawals of funds without incurring additional penalties or
true annuitization. fees. Generally speaking, surrender charges result from the
Many of these modern products are designed not as necessity of up-front commissions and the amortization of
true annuities but rather as vehicles that can continue to other acquisition costs. Many, but not all, annuity products
support accumulation and in which the investor retains involve such charges for early or unanticipated withdrawals.
the ability to access their principal. Some of these products, in
turn, include the ability to later annuitize the balance in full. 9. Just 2% raise the issue of fees: According to LIMRA, only
2% of annuity purchasers say they made their decision based
4. More than one in 10 value protection of principal: on the fees associated with their product. Broadly speaking,
According to LIMRA’s survey, 13% of investors say they simpler types of fixed annuities have lower fees compared
purchased their annuity product based on its ability to provide with more complex variable annuities, but the fee landscape
principal protection against market losses. One such product is dynamic and diverse. —John Manganaro

14 INVESTMENT ADVISOR FEBRUARY/MARCH 2023 | ThinkAdvisor.com