These are boom times for annuities, which are providing retirement savers and investors with not only their hallmark stability during what has been a dismal year for both stocks and bonds, but also the richest benefits in more than a decade and, in some cases, the promise of major upside when stocks rebound.
Sales of these hybrid insurance-investment products have surged this year—as has historically been the case in down markets and rising interest-rate environments—because their principal protection and high yields relative to other low-risk investment options make them attractive fixed-income replacements. Consider a current 4.05% three-year guaranteed fixed-rate annuity paid by Midland National Life Insurance, compared with 2.9% for a three-year certificate of deposit or the current 3.22% yield on a three-year Treasury.
But what’s different in the current bear market is that investors are also using annuities as stock replacements, turning to a newer type of contract called a registered indexed-linked annuity, or RILA, that is built for growth with a cushion under losses. Designed for retirement investors who fear losses but need stock returns to keep their nest eggs growing, RILAs provide various levels of protection on the downside—usually 10% to 20% of market losses—and a cap on the returns of an index such as the S&P 500, Russell 2000, or MSCI EAFE. The current caps allow for significant growth once the market perks up: Lincoln National Life Insurance and Symetra Life, for instance, offer S&P 500–tracking RILAs that will absorb the first 10% of the index’s losses, while capping its returns at 20%.