A variable annuity is a type of annuity contract,
the value of which can vary based on the performance of an underlying portfolio of mutual funds. Variable annuities differ from fixed annuities
, which provide a specific and guaranteed return.
Understanding Variable Annuities
There are two elements that contribute to the value of a variable annuity: the principal, which is the amount of money you pay into the annuity, and the returns that your annuity’s underlying investments deliver on that principle over the course of time.
The most popular type of variable annuity is a deferred annuity
. Often used for retirement planning purposes, it is meant to provide a regular (monthly, quarterly, annual) income stream, starting at some point in the future. There are also immediate annuities
, which begin paying income right away.
Before buying a variable annuity, investors should carefully read the prospectus to try to understand the expenses, risks, and formulas for calculating investment gains or losses.
A Closer Look at Variable Annuities
In “The Future View of U.S. Annuity Sales” research paper, The Secure Retirement Institute projects variable annuity (VA) sales to decline in 2020, but then have rebounding growth in 2021 and 2022.
The report is predicting the COVID-19 pandemic will have a significant impact on the VA market in 2020. Extreme volatility will have investors seeking safety and will keep many away from purchasing equity-based products, particularly products with limited insurance guarantees. Low interest rates will impact guaranteed living benefit offerings.
Expectations are for sales of investment-focused VAs and products with guaranteed living benefits to decline by as much as 15 percent or more, similar to the 18 percent decline the VA market experienced in 2009.
The registered index-linked annuity (RILA) market has not experienced a period of extreme market stress, as the first product to hit the market happened in 2010. In this year’s forecast, RILAs have been segmented, since sales expectations are much different than those of the other VA product types.
Registered index-linked annuity products will have appeal in times of equity market volatility as they can provide a combination of downside protection and growth potential. RILA sales are expected to grow to nearly $20 billion in
2020 as investors look for the balance of protection, safety, and growth potential.
The report suggests in 2021, variable annuity sales will rebound as the economy gets back on track. Modest growth is expected for investment-focused variable annuities and VAs with guaranteed living benefits, with stronger growth expected with RILA products. In 2021, RILAs could represent nearly a quarter of all variable annuity sales.
Finally, the report believes that in 2022, equity markets are expected to be back at the pre-pandemic levels. This will help continue to spur variable annuity sales growth, bringing sales to levels not seen since 2016.
RILAs will continue to see a faster growth rate than traditional variable annuity products as more carriers will be offering these products, combined with investors who will likely still be looking for a balance of protection and growth.
Fixed Index Annuities
If you are looking for upside potential and some downside protection a fixed index annuity may be a more appropriate alternative worth considering. Fixed index annuities offer upside potential based on the performance of a market index and downside protection from a potential market downturn. You can shop and compare current fixed index annuity rates at our online annuity store.