Displaying items by tag: annuities

The 2019 Secure Act was THE critical piece of legislation for annuities in the 21st century, but that could change with the upcoming LIFE Act which is working its way to voting. Where the secure act made legal production of annuities easier and allowed them to be a part of retirement plans, the LIFE Act will allow annuities to be a 50% asset allocation by default from employers. Currently, the LIFE Act has strong bipartisan and posts a strong potential of passing, this would allow investors to double their baseline investment in annuities where it was previously capped at 25%.

Finsum: The ultra low rate environment has many investors more interested in turning to annuities for income than almost any other time before.

Inflation and interest rate risks are two of the most prominent risks in the economy, and they are the reason so many are fleeing traditional fixed income. One place many investors are turning is to annuities, but how does interest rate risk affect annuities? For fixed annuities appreciating rates mean investors can get a better payout with the same premium and generally expand the offerings. For variable annuities, it's trickier as they are more tied to equity markets. If the Fed hikes too aggressively and markets respond adversely this could hurt variable rate products but if the stock market stays steady they won’t be under much pressure. As an income value proposition generally they both perform better than bonds in raising rates because higher yields (inflation and interest rates both moving) suppress bond prices directly.

FINSUM: Annuities have a lot of value in rising rates environments as an income product especially compared to government securities and CDs. 

Fixed-income investors are in the doldrums when it comes to today’s ultra low yield environment. Guaranteed income from CDs is just not high enough, and while bonds may be secure their value is at a valley. Laddering annuities is maybe the best strategy, but the questions are under duration. In a flat yield curve going for a short duration makes sense, and as the yield curve steepens moving to long-term contracts is more attractive. In today’s interest rate market, the goldilocks spot is around 5-years, it is a much higher return than shorter-term annuities and longer-term contracts tie your money up without much more of a return boost. The best part is you can integrate this annuity laddering strategy into IRAs and take advantage of all the tax solutions they bring to the table.

Finsum: It's critical to ladder the right duration depending on the current rate environment and given how much interest rate risk there is today it's more important than ever to be precise.

Annuities have had rapidly growing interest in the post covid era, and this has been especially true for variable annuities. What makes variable annuities attractive is inflation and interest rate risk which will elevate their value, however, for annuities providers and insurers, this is represented as risk. In an action to mitigate those risks Aegon, the parent company to Transamerica, engaged in a buyout program that ended in January. In total 18% of annuity holders capitalized on buybacks to settle their portfolio. Transamerica also expanded its hedging strategies to ensure against interest rate and equity risk for the remaining balance of its variable annuity portfolio.

Finsum: Recent legal changes have drastically affected the insurance and annuity industry which has been key to their growing demand, in addition to the covid-19 pandemic and rising subsequent unemployment.

Annuities are one of the safest financial securities that exist, but that doesn't mean they are without some risk. Sure one of the biggest risks to an annuity is dying early, but there are other external risks like liquidity. Annuities are among the most illiquid contracts and often come with heavy penalty fees in withdrawals. Additionally, if an annuity company goes bankrupt they aren’t regulated by FINRA, and state and local insurance agencies only cover between $250,000-500,000 in losses. In the current environment, inflation growth is a substantial risk to annuities because it devalues the future payment stream in a fixed rate annuity, and even if the Fed raises rates to curb inflation this will only make it a less attractive yield in comparison to the market.

Finsum: Overall, annuities look like one of the safest securities and variable rate annuities may mitigate interest rate risk.