What’s Ahead for Life Insurance and Annuity Products?
The past few years have been a roller coaster ride of pandemic impacts, interest rate increases and regulatory changes. At this point, indications appear to be leaning toward a return to a more stable environment and a return to steady growth trends for individual life in 2024 and annuities in 2025.
Life and annuity sales are impacted by both economic and noneconomic factors. Looking ahead to the next few years, we expect relief from some negative economic and regulatory trends, as well as some new challenges.
Interest rates impact both products heavily. Declining interest rates have put pressure on individual life profitability for years, but rising rates present new challenges, impacting hedge budgets and cap rates for indexed universal life (IUL), dividend scales for participating whole life, and putting pressure on private placement viability. Further increases will continue the pressure on these products/solutions. On the positive side, continued rate increases may cause carriers to begin increasing crediting rates on their fixed products. For individual annuity products, the boost in interest rates has brought the market to a new era, with crediting rates on fixed annuity products, as well as payout rates on income annuities and guaranteed living benefits bringing individual annuity sales to record highs in 2023.
Inflation limits consumer disposable income available for life and annuity premiums. Fortunately, inflation is beginning to moderate and is projected to fall to around the 2 percent Federal Reserve target by the end of the year.
Other factors impact some products more heavily than others. Equity markets impact variable product appeal. Moody’s currently projects the S&P 500 to increase through 2028. Unemployment most heavily impacts term life insurance, which has a more middle-market clientele. The unemployment rate has held below pre-pandemic rates after a brief uptick in 2020, helping term sales. Unemployment is expected to trend up through 2025, peaking just below 5 percent.
A persistent demographic shift will continue to be positive for individual annuities. Most individual annuity sales are to Americans aged 55-70, who layer on investment protection features and/or guaranteed income features as they near or enter retirement. In the U.S., it is expected we will add 1.4 million Americans age 65 or older every year, increasing the potential annuity customer pool.
Regulatory changes are the primary noneconomic factor that impacts life and annuity sales. Regarding individual life, we have seen multiple rounds of IUL illustration regulation, the Washington Cares Act, which caused massive temporary increases in life/long-term care product sales, and a change to Section 7702 of the U.S. Internal Revenue Code, which increased the amount of life premium that policyholders can contribute without losing their tax benefits. We expect a pause in life insurance product-related regulatory changes. On the annuity front, the industry is watching the recently proposed Department of Labor (DOL) Retirement Security Rule. This has the potential to impact the processes of insurance companies and distributors, taking resources away from product innovation and development as companies work toward compliance with these new regulations.
On top of the economic factors, the individual annuity market has been positively impacted by the capital infusion from investments made by private equity, as well as an increase in reinsurance activity. This capital infusion is helping offset the distribution costs insurance carriers have to cover, allowing sales to break long-standing records over the past few years.
Finally, we are starting to see a slow waning in consumer demand for life insurance as we gain distance from the height of the pandemic. This is not surprising as other factors like inflation are gaining more consumer mind-share. However, policy sales are still increasing, indicating that demand is still above pre-pandemic levels. Conversely, demand for annuity products has never been higher. Similar to individuals buying out all the bread and milk before a large storm, the unique economic conditions have investors seeking the investment protection features in annuities at record levels.
Individual Life Forecast
Inflation and unemployment pose a risk to term sales, especially to those in the middle market. As inflation begins to recede, it will still impact consumer disposable income but at a lower rate. An increase in unemployment would also have a negative impact on term insurance sales. We expect term to return to very low-digit growth in 2024 and 2025.
Easing inflation and improving consumer confidence create positive impacts for whole life insurance sales. The yield curve inversion appears to be reversing, which lessens the risk to whole life sales. Future risks that could lower growth include the potential (although slight) for increasing unemployment or a recession in 2024. Following flat-to-low growth in 2023, we are projecting slight improvements in 2024 and 2025.
While interest rates are increasing, there has not been much movement in carrier fixed credited rates, which remain low. If interest rates continue as projected by Moody’s and carriers become comfortable with this new, higher level, they may begin increasing crediting rates, which would help fixed universal life (UL) sales. However, many companies have pivoted to focus on other product lines, such as indexed and variable universal life (VUL). As a result, we expect fixed UL sales to continue to decline.
VUL is offered by fewer carriers than other life products and historically has been a more niche product, making sales more volatile and harder to predict. After years of declines, VUL has seen some spectacular increases in recent years, driven first by protection-focused products with up-to-lifetime guarantees and then by IRS Section 7702 changes, which provided a boost to accumulation products. We expect double-digit growth to continue. This projection is dependent on stock market performance and interest rates. If equity markets do not increase as projected for the next several years, it will negatively impact VUL sales.
IUL premium fell in 2023, declining from strong sales during the first half of 2022, driven by tax law changes. Regulatory impacts on illustrations were also a factor, as were interest rate increases, which impacted the viability of some premium finance deals and led to decreases in some carrier cap rates. We expect to return to more normal growth in 2024 and 2025 as we get past the impacts of IRS Section 7702 but struggles with illustrations continue.
All this together leads to a continued shift in product mix, but low-to-moderate growth overall. Historically, individual life insurance sales have declined during recessionary periods. The exception is the downturn during the early 1980s when UL insurance was introduced and gained in popularity. Interest rates were high, and the industry saw a substantial amount of replacement activity as policyholders replaced their low-interest-rate whole life policies with UL. Conversely, individual life insurance premiums tend to increase during periods of expansion. Sales grew by 3.1 percent during the most recent expansion, prior to the pandemic. We expect to return to a period of similar growth in the next few years.
Individual Annuity Forecast
Unique economic conditions have created unprecedented demand in the past few years, yet these conditions will continue to be dynamic. With expectations of moderate decline in interest rates and improvements in equity markets, we likely will see less “flight to safety” sales in individual annuity products. This will bring down sales in product lines such as fixed-rate deferred annuities and fixed indexed annuities in 2024, before sales start to rebound in 2025 and 2026. The rebound will be fueled by the record level of sales experienced in products such as fixed-rate deferred annuities. Over a quarter of a trillion dollars have been sold in this product line alone in the past two years, and with many of the products being sold having a short duration, there will be a significant amount of money in motion.
Registered index-linked annuities will continue to see steady growth as equity markets get back into a growth pattern. Investors’ risk tolerance will shift, with more investors looking for a balance of protection and growth moving forward.
Traditional variable annuities will continue to have headwinds, as limited investment protection and alternative options for guaranteed living benefits will eat into this product category. While we do expect sales to rebound off the lows experienced in 2023, growth will be muted.
With the continued demographic shift in America, combined with fewer Americans entering retirement with a corporate pension, the demand for guaranteed income will continue to grow. Products such as income annuities are expected to see a slight pullback in 2024 as interest rates decline, yet sales will gain steam in 2025 and 2026 as the need for guaranteed income solutions will be more prevalent.
Putting it all together, we have entered a new era for individual annuity sales. 2022 was the first year annuity sales exceeded $300 billion in a year, and there is no indication we will be going back to where we were. Continued demand from investors for investment protection and guaranteed income will fuel individual annuity sales moving forward.