Brett Arends’s ROI: While stocks and bonds plunge, sales of these ‘safe’ investments are booming

by | Dec 1, 2022 | Stock Market

Yep. Right on cue. As stocks, bonds and other investments have tanked, ordinary investors have flooded into higher-fee annuity products in the quest for investments with more “safety” or “protection.” One of the many reasons ordinary investors underperform the market over the long term is that so many tend to flee stocks after things have slumped. They won’t get excited about the market again until it’s back up.

LIMRA, a trade association for the insurance industry, reports sales of annuities have skyrocketed this year. Overall annuity sales jumped an astonishing 29% in the third quarter from a year earlier, hitting a record $81 billion, LIMRA reports. So far this year sales are up 17% to $224 billion. Annuities are financial products produced by insurance companies, and they are a kind of hybrid of insurance and investment. They actually come in so many different kinds, including “fixed rate deferred annuities,” “fixed indexed annuities,” “registered indexed linked annuities,” and so on. Annuities certainly aren’t all bad. They can, for example, allow you to invest while sharing some of the risks with the insurance company selling you the product. They can also let you build a life insurance tax shelter around long-term investment returns. (It’s not as exciting as it may sound, as you will eventually pay higher ordinary income-tax rates on your gains, instead of lower capital-gains tax rates, but there can be some real benefits.) But insurance companies do not sell these products below cost, or out of the kindness of their hearts, and life insurance industry costs are rarely trivial. One way or another, customers pay, and they often end up paying a lot. The cost comes in the form of lower returns. They also have the problem that in many cases the insurance companies, for (sound) regulatory reasons, invest your annuity premiums in “safe,” investment grade corporate bonds. As those bonds have historically produced much lower returns over the long term than the stock market, the amount they can pay you is going to be pretty limited. In …

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