Market for variable annuities melts down

| November 17, 2023

Remember fondue? It’s been ages since I had it, and I think I have a pot with a set of fondue forks collecting dust somewhere. But at one time fondue was really popular, and a date at a fondue restaurant was considered the height of romantic dining.

Traditional variable annuities are having their fondue moment. Sales of these annuities, which were quite popular in the annuity universe not that long ago, have dropped off the table.

As always, it comes down to performance. Variable annuities are positioned as a way for owners to participate in market gains. When you buy a traditional variable annuity contract from an insurance company, you have options to invest those funds. Typically these are mutual funds investing in stocks, bonds, money market instruments, and so on. The value of your account will reflect the performance of the underlying investments.

That’s a different approach from the traditional annuity, which basically provides a fixed income stream for a fixed payment. Variable annuities became a popular option because people wanted to benefit from market gains in an annuity product.

But as economists like to say, there is no free lunch. In this case, no free fondue. Variable annuities have lots of costs attached to them, and they’ve been increasing in recent times. People tend to favor lower-cost investments such as exchange-traded funds or index mutual funds these days, and we’re seeing that in lower expense fees for mutual funds. Meanwhile, the performance of these annuities hasn’t been stellar.

Also, the markets have been marked by uncertainty since COVID started. Combine all these factors with the product’s general lack of downside protection for owners, and you have a recipe for shrinking demand. Another factor is that insurance companies are less enamored with them these days because they’re expensive for them to offer (only insurance companies can issue annuities).

I don’t think of investments as inherently “good” or “bad.” Annuities might be the right product for your needs, maybe even a traditional variable annuity. But I do believe there are ways to capture market gains that are easier to understand and have lower expenses, the silent killer of investment returns. I’m also have ongoing concerns about the lack of traditional variable annuities’ liquidity and flexibility.

But nothing is forever. Economic conditions are improving for traditional variable annuities. Many experts believe the risk of recession is lower today, with some saying they can’t see one on the horizon. That’s quite a different story from a year ago, when just about everyone was predicting a downturn.

So although other annuity products have become more popular in recent times, including ones that behave like hybrids of fixed and traditional variable annuities, I expect that traditional variable annuities will be a popular option again at some time. Then again, that’s how I am. Maybe it’s time to clean up the fondue kit.

https://www.limra.com/en/newsroom/news-releases/2023/limra-strong-performances-in-fixed-indexed-and-fixed-rate-deferred-annuities-drive-robust-overall-sales-results-in-third-quarter-2023/

https://www.investor.gov/introduction-investing/investing-basics/investment-products/insurance-products/variable-annuities#:~:text=A%20variable%20annuity%20is%20a,a%20stream%20of%20periodic%20payments.

 


Evan R. Guido is the Founder of Aksala Wealth Advisors LLC, a 2018 Forbes Next-Gen Advisors List Member, and Financial Professional at Avantax Investment ServicesSM. Evan heads a team of retirement transition strategists for clients who consider themselves the “Millionaire Next Door.” He can be reached at 941-500-5122 or eguido@aksalawealth.com.   Read more of his insights at https://finance.heraldtribune.com/category/ask-guido/. Securities offered through Avantax Investment ServicesSM, Member FINRA, SIPC.  Investment advisory services offered through Avantax Advisory ServicesSM, Insurance services offered through  an Avantax affiliated insurance agency.  6260 Lake Osprey Dr. Lakewood Ranch, FL 34240.  The views and opinions presented in this article are those of Evan R. Guido and not of Avantax Wealth Management® or its subsidiaries.  Past performance does not guarantee future results. The S&P 500 is an index of 500 major, large-cap U.S. corporations. Standard & Poor's is a corporation that rates stocks and corporate and municipal bonds according to risk profiles. The S&P 500 is an index of 500 major, large-cap U.S. corporations. You cannot invest directly in an index.  An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency.  Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.  CDs are FDIC insured and offer a fixed rate of return.  They do not necessarily protect against a rising cost of living.  The FDIC insurance on CDs applies in case of insolvency of the bank, but does not protect market value.  Other investments are not insured and their principal and yield may fluctuate with market conditions. Investments are subject to market risks including the potential loss of principal invested.  Variable annuities are subject to market risk.  Investment return and principal value will vary so that units, when redeemed, may be worth more or less than their original cost.  Also, withdrawal of earnings will be subject to ordinary income tax and may be subject to 10% IRS penalty tax if taken prior to age 59 ½ .  The death benefit guarantee is subject to the claims paying ability of the issuing insurance company and does not apply to the investment performance or safety of the underlying investment options.  Variable annuities are suitable for long-term investing, particularly retirement savings.