Fixed vs. Variable Annuities: The Tables Have Turned

What You Need to Know

A decade ago, fixed annuities made up less than a third of the market.
As boomers have gotten older and sought protection over growth, that trend has reversed.
Variable annuity sales will likely stay muted until the industry decides to go after younger investors.

A few years back, I asked an advisor why he had shifted to recommending fixed indexed annuities (FIAs) rather than variable annuities. His answer was very simple: “My clients are getting older, and they are more interested in protection than growth.”

This has proven to be a prophetic statement for the annuity industry. According to LIMRA, in 2013, fixed annuities and FIAs made up just 30% of the $230 billion in total annuity sales. Structured annuities were so new they were just 1% of total sales. Variable annuities dominated the market, with 62% of total sales. 

Fast forward to 2023 — fixed annuities and FIAs, the two annuity types that provide 100% downside protection, captured two-thirds of the total $385 billion in record annuity sales while variable annuities captured just shy of 15%. Amazingly, fixed annuity sales surpassed their previous annual record by a whopping 46%.

So, what’s changed? It’s simple, really. In 2024, 12,000 baby boomers will turn 65 each day. These individuals have a very different investment objective than they did 10-20 years ago. It’s no longer about accumulation for them — it’s now about protection.

The traditional 60/40 portfolio is supposed to provide conservative investors with much of this desired protection. However, in 2022, those with a traditional equity/bond allocation saw their portfolio fall 16%. Many of the baby boomers who had already retired or were very near retirement were looking for a different solution in 2023. And with the Fed rate hikes throughout the year, insurance companies were able to offer investors more attractive fixed annuity and FIA terms. 

In the fourth quarter of 2023, sales of structured annuities (also known as registered index-linked annuities, or RILAs), a mere infant in the annuity industry just 10 years ago, surpassed variable annuity sales for the first time ever. For the year, they captured a record $47.4 billion in sales.

The increased popularity of this annuity category versus variable annuities is undoubtedly due to the fact that structured annuities provide some downside protection while variable annuities provide relatively little without added riders. This makes them an attractive alternative for the equity portion of an investor’s portfolio. However, if an investor’s primary goal is to not go backwards at all, then structured annuities, even with their partial protection, will simply not have the same appeal of fixed annuities or FIAs.