Not your grandfather’s annuity: This guaranteed lifetime income plan has evolved

There’s no denying it – annuities are hot right now. Following record-high sales in 2022, LIMRA reported first half 2023 annuity sales jumped 28% to $182.7 billion, the highest ever recorded in the first six months of a year. Sales aren’t expected to slow either. Even though interest rates are expected to level off, LIMRA forecasts 2023 annuity sales to top $300 billion for the second year in a row.

Nationwide’s Advisor Authority study found that annuities are the top choice for advisors protecting clients’ assets against market risk, but only about half of investors with an advisor say the same. With so many investors unsure about incorporating annuities into their financial plans, what is holding them back/?

Let’s be honest. Annuities can be perceived as complex or confusing if you’ve never worked with an advisor or financial professional to understand how they may fit into your financial plan. And frankly, there are a lot of mixed messages out there about the benefits and drawbacks of annuities, depending on who you listen to. That’s why it’s important for advisors to talk with their clients about how annuities can be a powerful addition to their portfolio.

Below are some common investor misconceptions that may be turning investors away from annuities – and ways you can address them.

Myth 1: Annuities are too costly

As traditional pension plans become rarer, retirement planning and the burden of planning for income in retirement is falling more on individuals. Most Americans simply don’t have the protection and predictability their parent’s defined benefit pension plan offered. However, annuities can help bridge that gap if your client recognizes the value in having them.

While it’s true that there can be a cost associated with annuities, any cost is meant to drive consumer value. Annuities function as an insurance product, offering guaranteed income and features that provide a level of protection during market volatility.

To help investors consider the value they receive for the cost, ask them if they can afford to hope they don’t outlive their income in retirement, only to realize they are out of money when they can no longer go back to work. Can they afford to watch their 401(k) nest egg disappear due to an unexpected market decline when they are in or near retirement/?

The bottom line? Today, many investors are finding any cost associated with annuities to be a fair trade-off for greater confidence in their retirement plan.

Myth 2: Fixed annuities are the only good annuity to purchase in today’s market

Fixed annuities have dominated the news lately, so chances are investors may be familiar with them. In fact, LIMRA reported that every major fixed annuity product line experienced at least double-digit, year over year growth across the industry in the first three months of the year.

However, it’s worth noting that as interest rates have risen, annuity providers have been able to offer increasingly competitive features on variable annuities (VAs) and registered-index linked annuities (RILAs).

For example, VAs with living benefit riders have seen increased payout rates over the past year, allowing advisors to provide more guaranteed lifetime income to their clients when developing their retirement plans. VAs can also offer more investment portfolio flexibility depending on a client’s needs – especially for those who may want greater potential for growth with the added benefit of a guarantee. Meanwhile, RILAs will continue to attract investors who are seeking greater returns on their investment and are willing to accept some downside risk.

While fixed annuities are popular in an environment where downside protection is top of mind, VAs, RILAs and a variety of other annuity products may be worth considering depending on investor’s goals – particularly if upside growth is a priority.

Myth 3: Once you invest in an annuity, you’re stuck with that option

The annuity industry has seen many changes over the course of its history. In the past, some annuity providers locked in products and beneficiaries upon purchase, making it impossible for investors to make adjustments when circumstances shifted. The good news is annuity products have evolved, product development has progressed and the industry has focused on becoming more investor centric.

Most annuities now include free withdrawal provisions, which allow contract owners the ability to withdraw a designated portion of their funds – often 10% each year – without incurring a surrender charge. Others have waivers that allow access to account values without penalties if triggering events occur, like hospital stays, nursing home admissions or terminal illnesses, to name a few.

The reputation annuities gained in the past for being inflexible is rapidly becoming outdated. Annuity providers have become more sensitive to the reality that sometimes life forces investors to flex their strategy – and they are here to help when that time comes.

Myth 4: Financial services providers are on shaky ground right now

The financial services industry is feeling the impact of the turbulent markets and high interest rates we’ve all been facing – and we’re beginning to see struggles in the banking industry. That may be making some investors wary about purchasing an annuity right now, however, you can reassure your clients that annuity providers are still strong and stable. In fact, S&P Global said the US life insurance sector is one of the most highly rated and stable sectors the firm tracks, with 91% of the rated companies in the AA or A rating categories.

Advisors should stay up-to-date on carrier ratings and guide their clients toward companies that are strong and stable, ensuring they are investing in products that will help them weather any storm. The good news is there are a variety of solid carriers to choose from in today’s market.

Related: The new conversation around annuities in the workplace

A turbulent economy over the past few years has served as a powerful reminder that retirement savers need to prepare for the unexpected. The protection annuities offer can be an attractive solution for those who can’t afford to simply hope for the best in an uncertain future. It’s healthy for clients to have questions, concerns or even reservations about costs, flexibility or the type of annuity that may best fit their needs. However, as their trusted advisor, you can work with them to address misperceptions they may bring to the table with facts, options and a clear understanding of an investor’s specific retirement goals.

Rona Guymon is Senior Vice President at Nationwide Annuity Distribution.