Annuities Market Growth: Why Now Is A Good Time to Buy

Annuity sales are booming. LIMRA says total annuity sales reached $432.4 billion in 2024, representing a year-over-year increase of 12%. It’s clear that more people are turning to annuities as a retirement planning tool – but what’s driving this annuities market growth? To understand the increasing popularity of annuities, it’s important to understand the economic factors that are driving growth.

But First – What Are Annuities?

An annuity is a contract between an insurance company and an individual. The individual pays an upfront premium in exchange for a steady stream of payments, which can either start immediately or at a selected future date. This is why annuities can be used as a source of retirement income.

Annuities can be structured in different ways. Two variables are particularly important:

1. When payments begin. Immediate annuities begin providing payments shortly after the purchase, while deferred annuities give the original premium payment more time to grow before payments start.
2. How the annuity grows. Variable annuities grow at a variable crediting rate, and the payments are also variable. Fixed annuities grow at a fixed crediting rate, and the payments are also fixed.

These differences are crucial for understanding why annuities are popular and which factors make certain types of annuities particularly attractive.

Interest Rates and Annuities

If you’re trying to refinance your house, buy a car, or take out a big loan, high interest rates are a problem. However, if you’re saving money and want your savings to grow, high interest rates could help you.

Annuity companies invest the premium payments they receive, allowing the annuity to grow over time. When interest rates are high, fixed annuity buyers can benefit from a higher growth rate, which results in bigger payments.

Interest rates have been relatively high recently. The federal funds rate is the target interest rate set by the Federal Open Market Committee of the Federal Reserve. The effective rate was 5.33% for most of 2024. Beginning in September, a series of cuts brought it down to 4.33%. However, this is still significantly higher than it has been in the recent past. In fact, the last time rates were this high was around 2006 to 2007. In 2021, the federal funds effective rate was just 0.10%.

High interest rates have likely been a factor helping to drive annuities market growth in recent years. Interestingly, LIMRA says annuity sales dropped slightly when interest rates declined in late 2024, even though total sales for the entire year were still up.

Nevertheless, it’s important to keep in mind that interest rates are still relatively high. What’s next for interest rates is currently unclear. According to Investopedia, the Federal Reserve has paused interest rate cuts. However, interest rates are expected to drop eventually, even if it doesn’t happen this year. Also, interest rates offered by individual companies may rise and fall even when the federal funds rate stays steady.

What does this mean for annuity buyers? Annuity buyers who want the best return should watch interest rates and buy an annuity before rates fall. This is especially important for fixed annuities because these products provide a fixed rate. If you buy a fixed annuity when interest rates are high, you’ll lock in an excellent rate even if interest rates fall later.

Finding Security in Economic Uncertainty with Fixed Annuities

Many people are worried about financial security during retirement. Annuities provide a solution.

Retirees are particularly vulnerable to economic uncertainty. For example, a stock market downturn is bad for anyone with money invested in the stock market, but it’s particularly problematic for people who are retired (or near retirement) and depending on a 401(k). Likewise, high inflation rates may cause financial stress for anyone, but they’re especially problematic for retirees living on a fixed income. In recent years, high inflation and market volatility have driven this point home.

Many people are also worried about the future of Social Security retirement benefits. Unless something changes, the Social Security trust fund could be depleted by 2033. In light of this, some people think benefit cuts may occur. A survey from Bankrate found that 73% of Americans who have not retired yet are concerned that they won’t receive the Social Security benefits they’ve been promised when they reach retirement age. This could be a major financial hardship, since 53% of those surveyed also said they expect to rely on Social Security when they retire.

Whether there will be cuts to Social Security remains to be seen. Likewise, no one knows what will happen in the future regarding stock market performance or inflation. This economic uncertainty is what drives many people to buy annuities as a guaranteed source of income.

Guaranteed Income Annuities and Tax-Deferred Growth

Although everyone has to pay their fair share of taxes, smart financial planners look for legitimate strategies that help simplify and minimize tax burdens.

Annuities are one such strategy. Annuities owned by individuals enjoy tax-deferred growth, which means the annuity policyowner does not have to pay taxes on the growth until he or she receives payouts or withdrawals.

Because of the great rates and tax deferral you get when you purchase an annuity, you may end up with better financial performance than you would have if you had kept your money in a savings account or a bank CD – even after you pay the taxes. Plus, annuities provide the predictability and guaranteed income that don’t get with the either of those options.

Should Retirees Seize the Annuities Market Growth Trend?

Annuities are a popular retirement planning option due to the high returns made possible by high interest rates and the ability to obtain guaranteed income amid economic uncertainty. As a result, annuity sales are surging. However, everyone’s situation is different. To decide whether an annuity makes sense for you, it’s important to consider your specific situation.

Here are some questions to ask:

• What type of annuity are you interested in? The characteristics of the annuity you purchase will make an enormous difference in the results you experience. If you’re looking to lock in high crediting rates made possible by high interest rates or want a guaranteed payout to help you withstand economic uncertainty, a fixed annuity might be a good fit for you.
• What’s in the fine print? Even within the same product type, there are differences in fees and various rules on early withdrawals. Understand your annuity contract before you sign.
• How does an annuity fit into your retirement plan? Many retirees leverage a variety of retirement income sources, such as employer-provided 401(k)s, IRAs and Social Security benefits. Map out when and how you plan to draw from your various sources of income, and where your annuity might fit in. For example, if you want to delay taking Social Security benefits until age 72, could annuity income fill the gap until then? If you want to add a source of predictable, guaranteed income to your retirement strategy, a fixed annuity could be a good option.

Interested in learning more about annuities? Canvas provides fixed annuity options designed to provide a guaranteed income during retirement. Calculate exactly how much interest you will earn with one of our annuity options. Learn more.