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%.
“If you think of a 60/40 portfolio, the 60 isn’t working and the 40 isn’t working,” says Steve Scanlon, head of individual retirement at Equitable, referring to the S&P 500’s nearly 20% loss this year and the bond market’s 10% decline. “Meanwhile, annuities have gotten more attractive as solutions on both sides of the portfolio.”
The ABCs of Annuities
Annuities are insurance products designed to protect ordinary investors against worst-case investment scenarios like steep portfolio losses and running out of money in retirement. They are tools for two basic purposes: to accumulate assets with downside protections, or to provide a steady stream of guaranteed income in retirement, like a pension.
The long menu of annuity types and features can be overwhelming. Even once you figure out which one best addresses your concerns, your work isn’t finished. Some contracts are pricey and best avoided, while others have trip wires that could cause terms to change based on investor behavior or market performance. Understanding the terms is essential.
Still, annuities’ popularity this year reflects how far investors have come in embracing these insurance products, whose costs and complexities have weighed on their reputation over the years. This past week, Equitable settled a case with the Securities and Exchange Commission, without admitting or denying the agency’s findings, surrounding inadequate fee disclosures.
To help frame the various annuity categories, how they work, and the best offers these days, Barron’s tapped Cannex, an independent research firm specializing in retirement products, as well as company data to compile a list of 100 competitive contracts based on common investor objectives and a set of assumptions, such as an investor’s age and investment size. Because many annuities are designed to last for the long term, only contracts from companies with an AM Best financial-strength rating of A- or above were considered.
The accompanying tables are a snapshot of what has been a rapidly changing market, as insurers revise terms to keep up with rising interest rates and evolving market conditions. For example, in the four months through June, Jackson National Life Insurance made 17 changes to different products’ rates and caps. “We hadn’t made changes in probably 18 months, so to make that many in four months is pretty material,” says Alison Reed, Jackson’s chief operating officer.
Best Annuities: Guaranteed Income. No Frills.
Fixed annuities are tools that turn a lump sum into a lifelong income stream, either immediately or sometime later. Single-life contracts pay for one person’s lifetime. Payouts are generally lower for women and couples because their life expectancies are longer. Joint-life contracts are for couples and continue to pay during a surviving spouse’s lifetime.
IMMEDIATE-INCOME ANNUITIES: Called single-premium immediate annuities, or SPIAs, these contracts turn guaranteed income on right away. Assumes a $200,000 investment at age 70. Payments for joint life assume a man is 70 and his spouse is 65.
CompanyAM Best RatingAnnual Income for LifeAnnual Payout RateTotal Income by Age 90Single-Life ManPenn Mutual LifeA+$16,0628.00%$321,240Nationwide LifeA+15,9107.95318,200Single-Life WomanPenn Mutual LifeA+$15,4947.70%$309,880CUNA MutualA15,0997.50301,980Joint LifePenn Mutual LifeA+$13,2446.62%$264,880CUNA MutualA12,9256.46258,500 CompanyAM Best RatingAnnual Income for LifeAnnual Payout RateTotal Income by Age 90Single-Life ManCUNA MutualA$15,0327.50%$300,640Nationwide LifeA+15,0207.50300,400Single-Life WomanCUNA MutualA$14,4067.20%$288,120Nationwide LifeA+14,2987.10285,960Joint LifeCUNA MutualA$12,7986.40%$255,960Nationwide LifeA+12,6856.34253,700
Note: Single life pays for one person’s lifetime; joint life pays for both spouses’ lifetimes.
The most popular annuities this year have been plain fixed annuities, which, much like CDs, pay a fixed yield for a specified number of years, and fixed-indexed annuities, whose payouts are linked to the performance of a stock index. Both are used in portfolios as fixed-income replacements, and have been driving overall 2022 annuity sales toward an annual record.
Second-quarter total annuity sales were the highest on record at $77.5 billion, according to Limra’s Secure Retirement Institute, an insurance researcher in Windsor, Conn., which predicts total annual sales will top the record of $265 billion set in 2008 and tally up to between $267 billion to $288 billion.
Plain fixed annuities with multiyear guarantees, or MYGAs, are paying guaranteed fixed rates more than double last year’s. The two top fixed annuities guarantee 4.05% and 3.9% for three years, compared with 1.9% and 1.8% last year for the same term.
“Stocks are down, bonds are down, crypto is down. They’re all correlated. But a fixed annuity is up,” says David Lau, founder of DPL, a commission-free annuities marketplace for fee-only advisors. “It gives you true diversification.”
Investors have been favoring shorter-term fixed annuity contracts—typically three or five years—so if interest rates keep rising, they aren’t locked in for the long term, says Kevin Rabin, senior vice president of retirement products at Symetra.
Best Annuities: Deferred-Income Annuities
Called DIAs, these contracts pay out future income. The longer income is deferred, the higher the annual payouts.
CompanyRatingAnnual Lifetime IncomeIncome Paid by Age 90Single-Life ManIntegrity LifeA+$25,017$500,340Mass Mutual LifeA++24,603492,060Single-Life WomanIntegrity LifeA+$23,564$471,280CUNA MutualA23,389465,778Joint LifeCUNA MutualA$19,719$394,382Mass Mutual LifeA++19,597391,934 CompanyRatingAnnual Lifetime IncomeTotal Income by Age 90Single-Life ManIntegrity LifeA+$66,028$660,280Symetra LifeA61,098610,980Single-Life WomanIntegrity LifeA+$58,705$587,050CUNA MutualA56,573565,730Joint LifeCUNA MutualA$41,801$418,010GuardianA++40,152401,520 CompanyRatingAnnual Income at Age 84Total Income by Age 90Single-Life ManIntegrity LifeA+$50,115$300,691Mass Mutual LifeA++38,861233,163Single-Life WomanIntegrity LifeA+$43,224$259,346Mass Mutual LifeA++34,540207,238Joint LifeMass Mutual LifeA++$26,924$161,549Integrity LifeA+26,814160,884
Note: Single life pays for one person’s lifetime; joint life pays for both spouses’ lifetimes.
Fixed-indexed annuities, a variation on the plain fixed contracts, have also stirred renewed interest among investors, thanks to their full principal guarantees. On the upside, they tie a capped return to a stock index. Limra anticipated sales of up to $57 billion for these annuities this year. Six months in, sales have already hit around $37 billion.
For the first time, Barron’s included fixed-indexed annuities as asset accumulators in our annual top 100 table. Until this year, low interest rates have depressed the caps on these contracts to levels that made their benefits questionable.
But caps on S&P 500–linked fixed-indexed annuities have more than doubled this year, to 9% from about 4% last year. The caps are more modest than those on RILAs because their principal protection is more generous than RILAs’ downside guarantees.
The Upside of RILAs
RILAs are also taking in significant assets. Since hitting the market in 2010, these have been the industry’s rising stars and fastest growers, up 61%, to $38.7 billion, last year, according to Limra. This year’s first-quarter sales were up 5%, but they lagged behind last year’s first quarter, as some investors favor full principal protection with many stock indexes in a bear market.
“The reason to like RILAs is inflation,” Lau says. “The only way to hedge inflation is to have investments in the market, and these give you caps of around 20% on the S&P 500 and take some risk off the table.”
Best Annuities: Guaranteed Income With Some Flexibility, Liquidity, and Growth Potential
Annuity contracts with income riders are designed to pay monthly income for life, covering either a single person’s or couple’s joint lifetime. Payouts can be higher than guarantees based on growth of assets in the contract, and assets are more liquid and accessible to investors than in SPIAs and DIAs.
FIXED-INDEXED ANNUITY INCOME GUARANTEES: These riders are purchased on S&P 500-linked fixed-indexed annuity contracts with seven-year surrender charge periods. Assumes a $200,000 investment by a 60-year-old. Payout begins at age 70. Joint life assumes spouses are age 60.
CompanyAM Best RatingAnnuity ContractRiderAnnual Income at Age 70Income Paid by Age 90Single LifeProtective LifeA+Income BuilderGuaranteed Income23,400468,000Eagle LifeA-Select Income FocusLifetime Income Benefit 2$22,000$440,000Minnesota LifeA+SecureLink Future 7Achiever Lifetime Income21,589431,780American NationalAStrategy Indexed Annuity Plus 7Lifetime Income 121,337426,740Joint LifeProtective LifeA+Income BuilderGuaranteed Income21,600$432,000Minnesota LifeA+SecureLink Future 7Achiever Lifetime Income21,589431,780Eagle LifeA-Select Income FocusLifetime Income 2$20,000$400,000American NationalAStrategy Indexed Annuity Plus 7Lifetime Income 119,397387,940
VARIABLE-ANNUITY INCOME GUARANTEES: These riders are sold as add-ons to variable annuities. Assumes a $200,000 investment by a 60-year-old. Payout begins at age 70. Joint life assumes both spouses are age 60.
CompanyAM BestRatingAnnuity ContractRiderAnnual Contract Fee*Maximum Allowable Stock Fund AllocationGuaranteed Annual Income for Life Starting at 70Income Paid by Age 90Single LifeNationwide LifeA+Destination B 2.0Lifetime Income + Core2.20%60%$17,920$358,400Lincoln National LifeA+ChoicePlus AssuranceLifetime Income Advantage 2.02.808017,600352,000AIGAPolaris Platinum IIIPolaris Income Max 2.65616,165323,300Joint LifeNationwide LifeA+Destination B 2.0Lifetime Income2.50%60%$16,320$326,400Lincoln National LifeA+ChoicePlus AssuranceLifetime Income Advantage 2.02.908015,520$310,400AIGA Polaris Platinum IIIPolaris Income Max2.65614,945298,900 CompanyAM Best RatingAnnuity ContractRiderAnnual Contract Fee*Initial Annual IncomePotential Average Annual Lifetime IncomeAnnual Income Guarantee if Underlying Account Drops to ZeroSingle LifeNationwide LifeA+Destination B 2.0Lifetime Income Plus Max2.60%$27,200$22,080$10,200AIGA+Polaris Preferred SolutionPolaris Income Max 22.4523,63722,3609,912Lincoln National LifeA+ChoicePlus AssuranceMax 6 Select Advantage2.8025,60022,0009,600Joint LifeNationwide LifeA+Destination B 2.0Lifetime Income Plus Max2.60%$26,350$20,297$10,200AIGA+Polaris Preferred SolutionPolaris Income Max 22.4522,41719,9608,692Lincoln National LifeA+ ChoicePlus Assurance BMax 6 Select Advantage2.9024,00019,2808,800
*Includes the contract mortality and expense charge and the rider fee; does not include costs of underlying fund-like investments.
Sources: Cannex; company reports
RILAs offer either a buffer or a floor on the downside, and a long list of indexes for upside participation.
With a buffer, the insurance company absorbs losses up to a point, typically 10% or 20%. For example, with a 10% buffer, if the market is down 15%, an investor will only take a 5% hit.
A floor product has different risk exposure: With a 10% floor, the investor, instead of the insurer, absorbs 10% of the loss and the insurance company eats anything beyond that.
“RILAs are the next step on the risk spectrum. First you have the MYGA, and fixed-indexed annuities are the next step,” says Mike Downing, executive vice president at Athene. “If you look at the age ranges, the older tend to focus on the MYGAs, and the RILA space skews younger because there is more upside and more downside risk.”
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Iterations on the original RILA buffer theme have exploded. The plain-vanilla RILA has a 10% buffer and a cap on the S&P 500, but now there is a long and growing list of flavors and toppings. For example, you can choose from over a dozen indexes for upside, downside protection ranging from 5% to 100%, various ways to credit your account to reflect market performance, and options to lock in performance before a contract year ends.
Investors’ choices don’t end there. Some companies offer two versions of the same RILA products, one with an annual fee that comes with a higher cap on the S&P 500, and another with no fee with a lower cap.
For example, Great American Life’s 10% buffer Index Frontier 7 RILA comes with a 26% cap on the S&P 500’s return for a 1% annual fee, and its version with no fee—expenses are baked into the cap—has a 19% cap.
A 26% cap might be worth paying for, if you believe the market will perform better than the no-fee contract’s 19% cap. But while making such decisions, consider that RILAs don’t include an index’s dividends. Underlying investments in RILAs aren’t invested in the stock market—they are in derivatives used to simulate an index’s return. Because assets aren’t actually invested in companies, investors don’t partake in dividends.
Best Annuities for Accumulation: Downside Protection With Upside
These annuities are designed to tie returns to stock indexes while providing varying degrees of cushion on the downside.
REGISTERED INDEXED-LINKED ANNUITIES (RILAS): These contracts, also referred to as variable-indexed annuities, combine some loss protection and upside tied to an index with limits set by caps or participation rates. Assumes a $200,000 investment tied to the S&P 500.
CompanyAM Best RatingContractSurrender Charge Period (Years)Annual FeeProtected LossCap on S&P 500 ReturnRate Term (Years)Commission-BasedGreat American LifeA+Index Frontier 77 1%10%26%1 AllianzA+Index Advantage6 1.2510231 Lincoln NationalA+Level Advantage6 None10201 Symetra LifeATrek Plus6 None10201 Lincoln National LifeA+Level Advantage6None15151 Protective LifeA+Market Defender II6 None1516.51 Lincoln National LifeA+Level Advantage6 None2012.51 Global Atlantic – Forethought LifeAForeStructured Growth6 None20121 CompanyAM Best RatingContractSurrender Charge Period (Years)Annual FeeProtected LossCap on S&P 500 ReturnRate Term (Years)Fee-BasedAllianzA+Index Advantage ADV6 .25%10%23%1 Lincoln National LifeA+Level Advantage AdvisoryNoneNone1021.51 Jackson National LifeAMarket Link Pro AdvisoryNoneNone10211 Lincoln National LifeA+Level Advantage AdvisoryNoneNone1516.51 Jackson National LifeAMarket Link Pro AdvisoryNoneNone2013.51 Lincoln National LifeA+Level Advantage AdvisoryNoneNone2013.51 CompanyAM Best RatingContractSurrender Charge Period (Years)Annual FeeMaximum Possible LossCap on S&P 500 ReturnRate Term (Years)Commission-BasedAllianzA+Advantage Income6 None10%13.75%1 Great American LifeA+Index Frontier 7 Pro7 None1013.51 Protective LifeA+Market Defender II6 None1012.51 Protective LifeA+Market Defender II6 None20221 Jackson National LifeAMarket Link Pro6 None2018.751 CompanyAM Best RatingContractSurrender Charge Period (Years)Annual FeeMaximum Possible LossCap on S&P 500 ReturnRate Term (Years)Fee-BasedAllianzA+Index Advantage6None10%13.75%1 Jackson National LifeAMarket Link Pro AdvisoryNoneNone1012.751 Jackson National LifeAMarket Link Pro AdvisoryNoneNone20201 CompanyAM Best RatingContractSurrender Charge Period (Years)Annual Fee Protected LossUpsideNew York LifeA++Premier VA FP Series7 1.2%; 1% (1)100% of principal (2)Full returns on underlying stock or bond funds.New York LifeA++IndexFlex VA FP Series5None or 1.3% (3)100% of indexed account value6.75% cap on the S&P 500; no cap on upside in subaccounts.AllianzA+Index Advantage6None10% bufferUncapped; 130% of S&P 500’s six-year return.Athene Annuity & LifeAAmplify 2.060.95%10% bufferUncapped; 145% of S&P 500’s six-year return.SymetraASymetra Trek Plus61.010% bufferUncapped; 141% of S&P 500’s six-year return.Great American LifeA+Index Summit 6 Pro6.75Half of any loss19% cap or 76% participation in S&P500’s annual return; 1-year termEquitableASCS Plus Dual Direction6None10% bufferS&P 500 annual losses within -10% give the equivalent positive return: -8% turns into 8%. Cap of 250%/450% (commissined/fee product) over six years.EquitableASCS 21 Plus Step-Up6None10% bufferIf S&P 500 annual return is flat or positive, you get a full 13% gain on commissioned contract or 15% on fee-based version.SymetraASymetra Trek Plus6None10% bufferIf the S&P 500 annual return is zero or positive, you get an automatic 14.5% returnLincolnA+Level Advantage6None10% bufferIf the S&P 500 annual return is zero or positive, you get an automatic 14% return
(1) 1.2% mortality and expense fee applies to contract value; 1% applied to amount guaranteed by a rider with a 10-year holding period.
(2) Protection begins after 10-year holding period; also potentially protects some growth; guaranteed amounts can be reset annually.
(3) Investors can choose, and switch between, an index-linked account with downside protection or regular variable annuity subaccounts. Only assets in the subaccounts are subject to a fee.
CompanyAM Best RatingContractProtected LossCap on S&P 500 ReturnCommission-basedLincoln National LifeA+FlexAdvantage 5100% of principal9.5%Athene Annuity & LifeAAccumulator 5100% of principal9Delaware LifeA-Growth Pathway 5100% of principal8.8Fee-basedPruco LifeA+PruSecure Advisor100% of principal11.5Lincoln National LifeA+Covered Choice Advisory 5 II100% of principal10Global Atlantic – Forethought LifeAForeAccumulation II Advisory100% of principal9
Sources: Cannex; company reports
Some companies, including Allianz, Prudential, CUNA Mutual, and Equitable, have introduced guaranteed-income riders on RILAs.
The first step for investors interested in RILAs is to choose between a floor and a buffer. Wade Pfau, Retirement Income Certified Professional program director at the American College of Financial Services, sees a clear winner: the buffer.
“More returns fall in between 0% and minus 10% than beyond minus 10%, so with a floor version you’d be getting hit more often,” Pfau says.
Since 1926, the S&P 500 has had 14 years with returns between 0% and minus 10%. Those down years could potentially have been protected by a 10% buffer. There were 11 years with returns worse than minus 10%. A 20% buffer would have spared investors losses in all but four years.
Generous Income Guarantees
Annuities with guaranteed income have largely taken a back seat in popularity this year, as investors have focused on trying to stabilize and secure growth for their portfolios, but guarantees are more generous this year.
Fixed and variable annuities can be combined with income riders that guarantee a minimum income for life, and possibly more if underlying investments perform well.
Riders are pricey, especially when considered on top of the fees for the contract they are tied to. For example, for a 60-year-old who wants to invest $200,000 in a variable annuity and plans to tap annual income at age 70, Nationwide Life’s Destination B 2.0 with the Lifetime Income + Core rider pays the highest guaranteed minimum annual income—$17,920—for a total 2.2% annual fee.
Best Annuities: Tax-Deferred Savings
These annuities are used for accumulating assets on a tax-deferred basis. Like in a 401(k), there can be a 10% penalty for withdrawing assets prior to age 59 1/2. These fees and rates assume a $200,000 investment.
CompanyContractAnnual Contract Fee*Avg. Expense Ratio on Subaccounts**Surrender ChargeTotal Investment Options (Total Alternative Options)5-yr Avg. Ann. Return for Best-Performing U.S. Growth Fund***EquitableInvestment Edge Series ADVNone1.02%None110 (24)13.50%Lincoln National LifeInvestor Advantage Advisory Pro0.10%0.88None139(13)15.04Jackson National LifeElite Access Advisory II$240(1)0.78None123(8)12.11NationwideMonument Advisor$240(1)0.55None341(48)16.10NationwideAdvisory Retirement Income (NARIA)0.20%0.61None147(6)16.10Fidelity Investments LifePersonal Retirement0.250.57None61(2)16.00
*Fee includes: administrative and mortality and expense charges. There is no added fee on these contracts for return of contract value at death.
**Asset-weighted average expense ratios on underlying mutual fund-like investments.
***Through June 30, 2022
(1) Flat annual fee for any size investment; equivalent to 0.12% on a $200,000 investment.
Source: Company reports
CompanyAM Best RatingContractFixed Rate Period (Years)Guaranteed RateMidland National LifeA+Oak Advantage34.05%Brighthouse FinancialAFixed Rate Annuity33.90Delaware LifeA-Apex MYGA33.55Mass Mutual LifeA++Stable Voyage33.50Midland National LifeA+Oak Advantage54.60Brighthouse FinancialAFixed Rate Annuity54.30
The fee eats away at the underlying investments in the contract, which can eventually hit zero depending on market performance. Hitting zero value won’t affect the minimum lifetime payment in this contract—though in some contracts, income declines when underlying assets disappear—but there will be nothing left for heirs.
The trade-offs in these kinds of contracts are a reminder that annuities are insurance products, and protections come at a cost. The Lincoln annuity could be a solid solution for someone wanting the highest possible income guarantee, but not the wisest choice for someone wanting to leave as much as possible to heirs.
A trade-off that investors haven’t been willing to make is illiquidity for the highest payouts. Sales of annuities’ most inflexible, yet highest-paying, income products have languished this year.
Single-premium immediate annuities, or SPIAs, and deferred-income annuities, or DIAs, are about as simple as annuities get: You invest a lump sum and the contract pays out for life, like a pension, either immediately or in the future. Their payouts are up substantially. For a 60-year-old man investing $200,000 and planning to begin income at age 70, the most competitive DIA that pays remaining principal to heirs is Integrity Life’s, with lifetime annual payments of $25,017. Last year, the top contract paid $17,916.
But they are irrevocable contracts, and with interest rates expected to rise further, investors aren’t biting. Sales in this year’s first quarter were flat for SPIAs and minus 14% for DIAs, compared with 2021’s first quarter, according to Limra.
While annuity contracts are listed in Barron’s table in order based on a single objective—whether it is highest income, best rate, or lowest fee—investors should weigh other pertinent factors such as a contract’s liquidity, underlying investment limits, expenses, and potential upside to make sure the terms align with their goals.
Consider investment-only variable annuities, or IOVAs. Variable annuities are similar to 401(k)s. Assets are invested in underlying mutual fund-like subaccounts and grow tax-deferred, but can’t be touched without a penalty until age 59½. While most variable annuities come with income riders or other benefits—and substantial fees—IOVAs are cheap and used purely for extra tax-deferred growth.
In the table, IOVAs are ordered by their contract costs, so the Equitable Investment Edge Advisory Variable Annuity, which eliminated all contract charges this year, is listed in the top spot. But an investor who wants the most investment options, including alternatives, may decide to pay a flat $240 monthly fee—the equivalent of 0.12% on a $200,000 investment—for the Nationwide Monument Advisor Variable Annuity, which has 341 underlying investments, of which 48 are alternative investments, compared with the Equitable contract’s 110 options.
Bottom line: The best annuity for your neighbor is probably not going to be the best one for you. To get the best out of an annuity, first have a clear understanding of what you want, says Lau, “then choose one for what it can do for you.”