Since 2010 individual retirement savers have bought more than $1 trillion in annuities, and 2015 set an all-time record for purchases of a particular type called a fixed indexed annuity, according to the LIMRA Secure Retirement Institute, an insurance industry group. To add to individuals' appetite for annuities, corporations are buying record amounts of annuities to offload the cost and risk of retiree pension benefits.
Annuities represent a huge and growing business -- $237 billion last year, LIMRA says -- for insurance companies, banks, brokerage firms and mutual fund companies. To the individual brokers and planners who sell them, they offer lucrative commissions of as much as 10%.
For individual savers, annuities provide significant tax-deferral and estate planning advantages, notes Steven Azoury, an investment advisor from Troy, Mich. But today, when markets are volatile, security is the big draw for annuity shoppers.
"I've been around 35 years, and I've never seen it where the first thing they ask for is guarantees," Azoury says. "They used to ask about growth. They're not asking for that any more. The first thing out of their mouth is: I want guarantees."
Annuities do offer retirement savers dependable regular payments for life, no matter what markets or interest rates do. However, the many varieties, confusing terms, complex paperwork and imperfect transparency about costs and fees make buying annuities challenging and uncomfortable for some.
To begin with, unlike stocks and mutual funds with readily available price listings, almost the only way to get a feel for what annuities cost is to talk with a few sellers and get some quotes. "You have to shop around," says Ted Beck, president and CEO of the National Endowment for Financial Education, a financial literacy non-profit in Denver. "There isn't any easy way to look up a price and do a comparison."
It's important to compare quotes on similar annuities, since price can vary widely depending on features, he adds. The two main types are immediate and deferred. A buyer of an immediate annuity will start receiving monthly checks immediately. A deferred annuity starts making payments at some future point, such as the planned retirement date.
There are also sub-types. Fixed annuities pay a minimum interest rate. Variable annuities offer a payout that will fluctuate depending the rate of return on the investments, usually mutual funds. Indexed annuities, the fastest-growing type today, provide a return based on an index such as the S&P 500.
Different types also tend to be paid for differently. Buyers usually pay for immediate annuities with a single large premium. Immediate annuity buyers are often about to retire and are rolling over a 401(k). People typically buy deferred annuities, on the other hand, during a years-long accumulation phase of making regular payments.
Some pricing information is available to give you an indication of what each variety will deliver in the long-run. For instance, AARP advertises a sample fixed annuity that will pay a 65-year-old male purchaser $531 a month for life in exchange for a single premium of $100,000. For $250,000, that same purchaser will get $1,331 per month.
By comparing quoted payouts for similar investment amounts on apples-to-apples annuities, shoppers can get a useful idea of what the annuity costs, Beck says. But fees also should be considered.
The insurance companies that provide annuities may charge fees for administration, investment management and "mortality and expense," which includes selling costs and sales commissions. Other fees include surrender charges, which can be assessed if the purchaser decides he wants out of the deal and seeks the immediate return of the principal. Fees may total 1% to 8% and be hard to spot, since they can be subtracted from investment returns rather than explicitly charged.
Puzzling out annuities can be worthwhile, because of the nearly bullet-proof guarantees they offer. Failures of insurance companies that offer annuities are rare, and every state has special programs to reimburse annuity buyers if an issuer does go belly-up. Despite these guarantees, experts say it's wise to check the backer's rating with the A.M. Best Rating Service.
Also make sure you are buying from a reputable seller. Professional designations such as Certified Life Underwriter (CLU) and Chartered Financial Consultant (ChFC) indicate the agent or broker has received training and follows ethical standards. Some annuities require sellers to be licensed to sell securities as well. BrokerCheck can shine a light on a broker's background.
Annuities are best used as an element of a retirement plan rather than the whole thing. If you come into a large sum from a pension buyout or 401(k) cashout, Beck says, consider keeping some in mutual funds, bonds, dividend-paying stocks or other vehicles rather than sinking the full amount into an annuity. "I would not suggest spending all of it at once," he says. "The annuity is part of a retirement income plan."
Finally, consider timing. Today's low interest-rate environment means annuity buyers get less for their money than usual. So even if you think you're in the market for an annuity, your best move right now might be to wait, especially if you think rates will go up.
"This rate environment is something like I've never seen, and I've been around this for 40 years," Beck says. "We're all assuming at some point rates will go up. That should give you a higher monthly income when those rates go up."