An Introduction to Annuities

What are annuities?

Annuities are savings-oriented financial products generally sold by insurance companies. They come with several benefits for the purchaser of the annuity contract, including living benefits, death benefits, and tax benefits.

In this series, we’ll look at several types of annuity products and the current scenario of the annuity market.

An Introduction to Annuities

When a customer purchases an annuity, he or she pays a certain amount in lump sum or in the form of periodic payments to the insurer. This is known as the accumulation phase, which mainly involves growing the fund for the contract holder. The insurer then makes periodic payments to the customer after an agreed date until the death of the purchaser. This is known as the payout phase.

Key players

Listed US insurers who are leading players in the US annuity market include American International Group (AIG), Lincoln National Corporation (LNC), Prudential Financial (PRU), Voya Financial (VOYA), and MetLife (MET). US subsidiaries of several large European insurers also enjoy market leading positions. Other insurers that are part of the iShares U.S. Financials ETF (IYF) also operate in the annuity market.

Types of annuities

There are basically two types of annuities – variable and fixed. While variable annuities have remained popular over the years, their sales have decreased slightly in recent years. Fixed annuities, on the other hand, have seen strong growth in the market.

Annuity premiums and deposits have been holding at about 50% of total life insurance sales in the United States. The above chart shows the evolution of annuity sales in the United States.

Fixed annuities guarantee a fixed rate of payment on the account balance. This is known as crediting rate. The performance of this product is thus influenced by the spread between the investment return and the crediting rate. Since variable annuities invest heavily in equity assets, their performance is driven by movements in equity markets.

In the next two articles in this series, we’ll look at the top-line evolution of these markets in 2014.