Annuity Products and Investor Preferences

Insurance companies offer four main types of deferred annuities, each providing a different value proposition, exposure to risk and range of returns: fixed-rate deferred (FRD), fixed indexed (FIA), registered index-linked (RILA) and variable annuities (VA). Annuity carriers and distributors need to understand which product concepts have the greatest appeal and which groups find certain products most appealing. Sales trends can identify the products that succeeded within the constraints of today’s annuity marketplace, where most product selection decisions are left to the financial professional involved in the transaction, but they may not align exactly with investors’ preferences for balancing risk and return. Moreover, these trends cannot provide direct insight into investors’ expectations about future economic conditions or signal their intentions for future purchases.

In 2021, LIMRA asked investors to consider their current financial situations and to select 1 of 4 investment options in which they had to put $100,000. We described the investment options — all of which could be converted into lifetime-guaranteed income, or cashed out, after five years — in terms of downside protection and upside potential, not referencing the industry terms for these products. We found that descriptions of FIAs and RILAs were preferred over descriptions of FRDs and VAs, at which point interest rates were very low and the stock market was reaching all-time highs.?In the past 18 months, much has changed in the annuity industry and in the broader economic conditions within which investment decisions happen. Products with full downside protection, such as FRDs and FIAs, have been in higher demand, as crediting rates jumped and as stock market returns have been mediocre or poor.

Given these changes, in early 2023, we replicated and updated the 2021 study to test whether product preferences had shifted. As in the previous study, we surveyed Americans between ages 40 and 80, with $100,000 to $1.9 million in household investable assets. To keep the exercise as simple as possible, features such as premium bonuses, guaranteed living benefits or fixed-return options within FIAs, RILAs or VAs were not included. We showed investors the minimum and maximum rates of return and the range of values each product could produce after five years, which were derived from actual products on the market in early 2023. In addition, we presented study participants with a chart illustrating the minimum and maximum investment values after five years, side by side, for all four annuity types they viewed.

In 2023, descriptions corresponding to?FIAs?remained the top choice — they have the combination of downside protection and upside potential that appeals to these investors (see Figure 1). The share of investors selecting descriptions corresponding to FIA products increased since 2021, likely reflecting the significant increase in maximum expected return, from a 5% to 11% cap, in 2023. Investors who picked FIAs said they did so because they place more value on protecting their savings than seeking maximum gains, and for the full downside risk protection.

Figure 1 – Deferred Annuity Product Type Selected, 2023 and 2021

RILAs?are also popular, though slightly fewer investors chose them in 2023 than in 2021. RILA selectors want to maximize gains and anticipate the stock market will do well over the next five years.

When presented with a floor version of a RILA, investors were more likely to select it than when presented with a buffer version, 35 percent versus 26 percent, respectively. The apportionment of selections among investors who did not choose RILAs was about the same, but with an elevation of FRDs and FIAs in the buffer design condition. This finding suggests that the buffer-design RILA did not provide enough downside protection for investors with lower risk tolerances, who instead selected FRDs and FIAs.

FRDs?have risen in popularity since 2021, doubling their share of investors who selected them. Investors choosing FRDs cited safety, prioritizing protection over potential gains, and a preference for simple investments. As with FIAs, the increased crediting rate (from 1.5% to 5%) undoubtedly played a role. Perhaps as significant, by early 2023, investors would have experienced a very volatile and downward-trending stock market, with several major indices closing out 2022 double digits below their levels in late 2021. This experience may also explain why the proportion selecting?traditional VAs?fell, despite there being no change in the product descriptions. In general, these two products are less popular than FIAs or RILAs when described only in terms of their downside protection and upside potential.

Taken together, these findings reveal a shift in investor mindset and tolerance for risk. Although FIAs and RILAs remain the most commonly selected products, interest in protection-focused deferred annuities clearly increased. Carriers, distributors and individual advisors who can connect investors’ preferences for protection – even if that means giving up some upside potential – will be best positioned for success.

For more information about this research, including the full methodology, see Annuity Product Selection Redux on the LIMRA.com website (subscription required).