Bobby Samuelson, president and CEO of Life Innovators, has been closely observing the shifting dynamics of the annuity market, especially given the economic uncertainty and high interest rates of the last few years.
“Interest rates popped, and carriers have taken full advantage of that,” Samuelson says. But he’s a firm believer in the potential of annuities even when interest rates go down, highlighting the “core fundamental math” of annuities that help provide financial stability and the potential for attractive returns regardless of economic conditions.
But Samuelson emphasizes there’s a lot of work left to do in terms of educating consumers about the benefits (and misconceptions) of annuity products. And while he’s bullish about the “natural fit” of insurance into holistic financial planning, he’s also aware of the strong headwinds the industry faces in making this a reality.
Zinnia spoke with Samuelson about the current state of the annuity market, challenges and roadblocks to continued growth, and future market trends to look forward to in the annuities industry.
Zinnia: What advice do you have for carriers in terms of taking advantage of this prolonged period of high interest rates?
Bobby Samuelson: I think most carriers are doing a great job of taking advantage of it. They’re pouring into fixed products that feed on interest rates. And that’s our food, right? That’s our oxygen. That’s the air we breathe. For a long time, we were starved and suffocating with low interest rates. Then interest rates popped, and I think carriers have really taken advantage of that. You can see that in the multi-year guaranteed annuities (MYGA) market which has grown incredibly directly because of the change in interest rates.
When rate cuts happen, how do you think that will impact the annuities market?
Certain annuity products react differently to rate cuts, so I don’t expect the rate cut impact to be equal. Fixed-income annuities (FIAs) might do better in a rate cut environment because option prices get cheaper, whereas MYGAs are a pure rate play, so their response is different.
I think we’ll see MYGA sales dip for six months or so and then start coming back as rates normalize at a new lower level. But this will also depend on how other asset classes are performing. If we have equity market volatility, for example, it will make stability more attractive — and I expect this would drive flows into MYGAs and other fixed products. If bank CD rates drop quicker than MYGAs, we’ll continue to see consistent flows into MYGAs.
The registered index-linked annuities (RILA) market isn’t super rate-dependent — a drop in rates might help RILAs. So as rates go down, I think RILA products will look relatively more attractive compared to fixed options.
We’re well in the deep zone of these products being attractive, and I don’t think a few rate cuts will change that in the long term. It’s not just rates go up, rates go down, annuity sales go up, annuity sales go down. The geography of it changes based on the product structure.
Why are annuities still a good area for carriers to double down if and when interest rates are cut?
The core fundamental math still makes sense for annuities in that you’ve got solid investments in the credit market and you can earn a spread by offering annuity products. You’re basically raising money with annuities and you can go make a spread. If that ever changes, that’s where the problem lies.
If there’s a situation where we see cracks in the credit market and there’s a flight to safety from a credit standpoint because there are real defaults — well, then that’ll be a problem. But that’s not really a rate issue. That’s a credit issue. And those two things aren’t necessarily related.
What common roadblocks do consumers encounter when purchasing annuities, and how should carriers address them?
One is just awareness. People don’t really know that much about annuities. If you were to poll a random person on the street and say, “Hey, what’s an annuity contract?”, they would probably respond with something like, “It’s a product where I put money in and I get income for life” — if they even know what it is at all. Some of it just comes down to awareness of all the different things that annuities can do. That they’re not just for providing guaranteed income, but that they also offer potential tax benefits and can provide stable returns. There’s just a lot of different ways to use annuities that people aren’t aware of.
And then there’s basic operational stuff where the industry has had to play catchup. It’s easy to go on your brokerage account and click “buy” for a fund. You don’t have to fill out an application, wait, or talk to an agent, whereas if you buy annuities, you have to go through this almost archaic process. But I also think a lot of the perceived tech friction is based on annuities 20 years ago. The process was paper, now it’s electronic, and most companies can turn an application around in one or two days if it’s a new money application. The process for clients is actually really simple.
I think the biggest place we still struggle in is integration with other financial products. If you put money into an annuity, it likely won’t integrate with your Fidelity account or whatever you use to view all of your assets. So you have to remind yourself that you have this money sitting in this other account. But then you log in to the carrier’s portal and remember that the user experience is clunky and you forgot your password and you don’t know which buttons to click.
This stuff sounds so simple and elementary, but the reality is this is the experience that most clients have with these products, and it’s affected their decision to buy, own, and keep their money in annuities versus doing other things with it.
What do you feel are the biggest consumer misconceptions about annuities?
When people do know about annuities, their perceptions are often about commissions or fees being high or that the returns aren’t great. And look, there have been situations where the industry has built products where all those things were true. The stereotype is there for a reason, but it reflects what annuities looked like 20 years ago, not what they look like now.
It’s also reflective of the fact that people don’t fully understand the alternatives. For example, a FIA product that pays 10% all-in compensation over 10 years sounds like a lot, right? But if you put the money in bonds instead and pay your financial advisor 1% a year, that’s the same, if not more, than the 10% upfront. Because annuity commissions are paid upfront, it feels fee-heavy, but it’s actually comparable to what most financial advisors charge on other assets too.
What should carriers be doing more of in order to bridge the customer education and awareness gap?
Making annuities appealing to financial advisors is a big piece of the puzzle. If you think about what an annuity is, it takes raw materials, raw financial instruments, and packages them up in a product that has certain benefits. Well, what do financial advisors do? They help clients use the raw materials.
That’s what insurance companies are doing too. So I think the more we can position our products as complements to what financial advisors do — and even enhancers for what they do — and the ways that annuities empower clients as they think about integrated financial planning, the more advisor adoption we’re going to get for our tools.
Historically, the annuities industry has kind of positioned advisors as competitors to what we do — but it’s a both-and, not either-or, strategy. I do think advisors are a big blocking mechanism for more adoption of annuities. But that involves changing hearts and minds. And that’s really hard to do.
How have consumer attitudes or preferences changed over time regarding retirement or long-term financial planning, and how are carriers adapting?
The biggest change on this front is that if you go back to the 1980s, we didn’t have financial advisors. We had stockbrokers. We didn’t have people selling life insurance policies across state lines. We had local insurance agents. Now, stockbrokers are basically obsolete because everybody can go online and trade whatever they want. And local insurance agents are also fewer and farther between. And so what has come out of making these two categories obsolete is the idea of an integrated, holistic financial planner.
The problem with our industry is that we still mostly focus on product sales rather than financial planning and advice, so people see us as a bit out of step with where things have gone. But you’re seeing a lot more carriers emphasize planning products rather than pushing sales of specific products, and this excites me because if you think about integrating insurance into financial planning, you see that it’s a natural fit. There are unique things that life insurance, annuities, long-term care insurance, and disability insurance can do that you can’t replicate with a traditional financial plan.
So I would argue any good advisor doing holistic financial planning has to incorporate insurance into the conversation. But because it’s hard, a lot of them don’t. The world has moved towards holistic financial planning, and yet insurance is still fighting for a place in that conversation because it’s historically been slow to adapt and it pays compensation differently compared to other financial products. Ultimately, 10 or 20 years from now, we’ll see more alignment between what we do in insurance and what they do in holistic financial planning. Those two things will come together.
What do you view as the next big product or product feature in the annuities space, and what factors do you think will be responsible for that evolution?
We’re already seeing the next big evolution before our very eyes with RILAs getting income riders. That’s been going on for the last couple of years, and it’s the next logical conclusion to where income riders go.
What I’m most excited about is how the income rider changes in response to things like long-term care needs. More products are coming out with provisions where if you have a long-term care claim, you qualify for a bonus on your income benefit that helps cover some of your long-term care claim. And just other income features that more accurately match lifestyle or health changes versus just giving you a check every month.
I’m also interested in seeing how we bring more morbidity and mortality elements into these products. It’s not just purely an income for life sale. We sort of give people something that flexes with their own kind of situation. And we’re seeing more and more of that happening. That’s probably what I’m most excited about in that space.
Beyond just capitalizing on high interest rates, what else should carriers start doing to stay competitive across economic cycles?
I think they all know this, but what you’re investing in matters a lot. We’ve had a really good run over the last 20 years or so. We haven’t had a lot of credit problems. Even 2008 had some credit issues but in specific spots. One of the big things is it’s not just about what interest rates are doing, but rather what kind of credit spreads you’re getting. Where can you invest and get a return? Where can you invest when you feel like you’re getting protected from a risk standpoint and get higher returns? I think that’s a key thing all carriers are thinking about.
The other thing is equity volatility. A lot of our products are linked either directly or indirectly to equity volatility. Fixed-income annuities have a direct linkage. Registered index-linked annuities have a direct linkage. Variable annuities have an indirect linkage. I think there’s more to be said on the unique ways that equity volatility manifests in our products and how to design products that work in various equity volatility environments.
Caps are a good example of this. Do they work for customers? Would we rather have a participation rate that can be reset more often? There’s a stigma around resetting participation rates often. But why are we not more transparent? There’s all this macroeconomic stuff going on underneath, so why don’t we explain to clients how it impacts products? Why don’t we tell them when you have a renewal rate that comes through, here’s why it changed.
Instead, carriers like to wave their magic wand or pretend they have some secret sauce, when in reality this stuff is really simple. You earn a yield, you cut a spread, and then you buy call options. Tell the customer what you’re doing. Then you can more accurately reflect things going on in the underlying environment in your product in a way that’s beneficial for customers and you.
I think we assume that equity volatility is just part of the annuity product structure and that’s the end of the discussion. Instead, we should be thoughtful about how it manifests and what it means for clients. Rather than fight it, go with it. I think carriers have historically been unwilling to do this because it requires more transparency. But that’s what customers want. They want you to be transparent. Be transparent.
Disclaimer: This interview was edited for length and clarity and is general in nature. It is not a solicitation or promotion of any particular product. Individuals considering annuities should consult with a financial professional to learn more about the benefits and risks.