Consumers are funneling money into annuities as the stock market tanks and higher interest rates raise payouts for buyers.
Annuity sales in the third quarter of 2022 approached $80 billion, just edging out the $79.4 billion record set in Q2, according to estimates published by Limra, an insurance industry trade group.
Consumers are on pace to buy almost $300 billion of annuities in 2022, which would handily beat the $265 billion purchased in 2008, the current annual record, said Todd Giesing, assistant vice president of Limra Annuity Research.
As during the 2008 financial crisis, purchasing decisions seem largely guided by fear of volatility in the stock market and the possibility of recession.
The S&P 500 stock index firmly entered a bear market in June, and is still down nearly 19% in 2022 as of Wednesday afternoon. An investor holding U.S. bonds, which typically act as a ballast when stocks fall, has lost almost 16% in the past year.
“In ugly times, people get concerned about safety,” said Lee Baker, a certified financial planner and founder of Apex Financial Services, based in Atlanta. Baker is also a member of CNBC’s Advisor Council.
But annuities may not make sense for everyone, according to financial advisors.
There are many types of annuities. They generally serve one of two functions: as an investment or as a quasi-pension plan offering income for life in retirement.
Insurance companies, which issue annuities, offer buyers guarantees that hedge risk like market volatility or the danger of outliving savings in old age.
All annuity categories are benefiting from higher interest rates, which generally translate to insurers paying a better return on investment.
But lately, consumers have been pumping record money into two categories: fixed-rate deferred annuities and indexed annuities, according to Limra data.
Investors reconsider 60/40 stock and bond strategy amid market downturn
Fixed-rate deferred annuities work like a certificate of deposit offered by a bank. Insurers guarantee a rate of return over a set period, maybe three or five years. At the end of the term, buyers can get their money back, roll it into another annuity or convert their money into an income stream.
Indexed annuities hedge against downside risk. They are tied to a market index like the S&P 500; insurers cap earnings to the upside when the market does well but put a floor on losses if it tanks.
The average age of indexed-annuity buyers is about 63 years old — suggesting many are worried about the prospect of losing money as they approach retirement age, Giesing said.
“Anything that’s protection-based and has some downside protection is doing very well,” Giesing said of sales.
Meanwhile, consumers are shying away from variable annuities, the performance of which is generally directly tied to the stock market. Sales are on pace for their lowest year since 1995, according to Limra.
How to know if an annuity makes sense for you
Financial advisors often recommend using a different flavor of annuity when building financial plans: a single-premium immediate annuity or deferred-income annuity.
These are for retirees seeking a guaranteed, pension-like income each month for life. Payouts from immediate annuities start right away, while those from deferred-income annuities starts later, perhaps in a retiree’s 70s or 80s.
These payments, coupled with other guaranteed sources of income like Social Security, help ensure a retiree has cash to cover necessities (a mortgage, utilities, food, etc.) if they live a long time and their investments are tapped out or dwindling.
Workers looking for guaranteed retirement income
“Am I worried about the client running out of money? If yes, that’s when I think about an annuity,” said Carolyn McClanahan, a certified financial planner and founder of Life Planning Partners, based in Jacksonville, Florida.
McClanahan, a member of CNBC’s Advisor Council, doesn’t use single-premium immediate annuities or deferred-income annuities with clients who have more than enough money to live comfortably in retirement. Annuities become more of a preference for those in the middle, who are likely but not necessarily going to have enough; for them, it’s more of an emotional calculus: Will having more guaranteed income offer peace of mind?
‘A lot of people don’t understand the limitations’
Of course, different categories of annuities come with tradeoffs.
Single-premium immediate annuities and deferred-income annuities are relatively simple to understand compared with other categories, advisors said. The buyer hands over a lump sum to the insurer, which then guarantees a certain monthly payment to the buyer starting now or later.
That’s because they don’t come with bells and whistles that cost buyers money. For example, consumers can buy variable and indexed annuities with certain features — known as “guaranteed living benefits” — that let buyers opt for a lifetime income stream or for liquidity if they need money or no longer want their investment. Those benefit features also generally come with restrictions and other fine print that may be difficult for consumers to understand, advisors said.
“The fancier the annuity, the more the underlying fees are,” McClanahan said. “And a lot of people don’t understand the limitations. It’s important to know what you’re buying.”
By contrast, consumers can’t get back principal when they buy single-premium immediate annuities or deferred-income annuities. This is one likely reason consumers don’t buy them as readily, despite their income efficiency, Giesing said.
The fancier the annuity, the more the underlying fees are. And a lot of people don’t understand the limitations. It’s important to know what you’re buying.
Carolyn McClanahan
CERTIFIED FINANCIAL PLANNER AND FOUNDER OF LIFE PLANNING PARTNERS
Quarterly single-premium immediate annuitysales have hovered around $2.5 billion, and consumers buy about $500 million to $600 million of deferred-income annuities, Giesing said — about a tenth and a fiftieth, respectively, of the nearly $30 billion of fixed-deferred-annuity sales in the third quarter.
From a behavioral standpoint, protection-focused annuities may make sense for someone five to 10 years away from retirement who can’t stomach investment volatility and is willing to pay a slightly higher cost for stability, Baker said.
But Baker cautioned that value proposition likely doesn’t make sense for investors any more. It would effectively lock in big stock and bond losses, and then cap gains to the upside for the term of the insurance contract, he said. Investors can now get a return over 4% on safe-haven assets like shorter-term U.S. Treasury bonds (a 3-month, 1-yearand 3-year, for example) if they hold those bonds to maturity.
The market is currently in a news-driven environment where the prices of cryptocurrencies have been determined by news agenda rather than fundamentals.
Bitfinex analysts have warned crypto investors to be cautious as bitcoin’s (BTC) recovery over the weekend is not a sign that its correction is over; the asset could witness more bloodshed in the near term.
In the latest Bitfinex Alpha report, experts deemed the market’s reaction this week critical, especially as supply alleviated over the weekend could return when traditional markets open.
“No Man’s Land”
Since Saturday, bitcoin has risen almost 10% from $57,600 to $63,000, closing last week in the green. The asset has surged above the 125-day range low of $60,200, which it broke through earlier this month after news of the German government’s massive BTC selling hit the market.
Market sentiment began to improve after reports that wallets linked to the German government were almost empty. However, the positive sentiment may not be sustained for long as the BTC the German authorities moved to trading desks and exchanges are yet to be sold.
While the supply from Germany appears to have been factored into bitcoin’s market price, Bitfinex analysts believe the end of selling pressure depends on how the involved trading desks execute their trades in the coming days.
Although the shift in sentiment underscores the market’s capacity to integrate new information and adjust expectations quickly, analysts think the market’s reaction over the first two trading days of the week cannot be overlooked for two reasons.
First, the low support level in the $60,200 range has now become a potential resistance line. Second, trading patterns over the past three months suggest that weekends are usually favorable for markets, especially on Saturdays when supply pressure seems to subside.
“We are now in no man’s land until we get clear resolution above or below this level,” the analysts said.
A News-Driven Environment
Besides the potential resistance level and three-month weekend trading pattern, the market is currently in a news-driven environment, where the prices of cryptocurrencies have been determined by news agendas rather than fundamentals.
Since selling pressure concerns are not yet completely obsolete due to upcoming Mt Gox creditor distributions, Bitfinex analysts expect such headlines to continue to have some impact on price movements. As such, the analysts urged investors to exercise caution in their trading strategies.
BlackRock’s IBIT led with $117.25 million in inflows on July 15, also being the most traded Bitcoin ETF.
The US spot Bitcoin ETFs recorded a daily net inflow of $301 million on July 15th. This extended their winning streak to seven consecutive days amidst a broader market recovery.
None of the ETFs recorded outflows for the day.
Bitcoin ETFs Rake in $16.11B in Net Inflows Since Jan
According to the data compiled by SoSoValue, BlackRock’s IBIT, the top spot Bitcoin ETF by net asset value, recorded the largest net inflows of the day at $117.25 million. IBIT was also the most actively traded Bitcoin ETF on Monday, with a volume of $1.24 billion. Ark Invest and 21Shares’ ARKB came in close behind with net inflows of $117.19 million.
Fidelity’s FBTC experienced net inflows of $36.15 million on Monday, while Bitwise’s BITB saw $15.24 million in inflows. VanEck’s HODL, Invesco and Galaxy Digital’s BTCO, and Franklin Templeton’s EZBC funds also recorded net inflows. Meanwhile, Grayscale’s GBTC and other ETFs, such as Valkyrie’s BRRR, WisdomTree’s BTCW, and Hashdex’s DEFI, registered no flows for the day.
A total of $2.26 billion was traded on Monday. The trading volume for these ETFs was less than in March when it exceeded $8 billion on some days. Meanwhile, these funds have collectively attracted $16.11 billion in net inflow since their January launch.
What’s Next For Bitcoin?
Earlier this month, bitcoin’s price decline was mainly due to fears of massive selling pressure from Mt. Gox and the German government’s BTC sales.
But the assassination attempt on pro-crypto former US President and presumptive Republican candidate Donald Trump at Saturday’s rally seemed to spark a recovery in the world’s largest digital asset, and experts are bullish on the asset’s price trajectory going forward. Bitcoin surged more than 9% over the past week and was currently trading slightly below $64,000.
Veteran trader Peter Brandt discussed bitcoin’s price outlook, suggesting a potential major rally. He referred to a pattern he terms “Hump->Slump->Bump->Dump->Pump” and highlighted that the July 5 double top attempt was a bear trap, confirmed by the July 13 close. He sees a likely continued upward trend but warned that a close below $56,000 would negate this bullish view.
“Bitcoin $BTC could be unfolding its often-repeated Hump…Slump…Bump…Dump…Pump chart construction. Jul 5 attempt at the double top was a bear trap, confirmed by Jul 13 close. Most likely scenario now is that bears are trapped. Close below $56k negates this interpretation”
PeckShield alert reveals LI.FI’s protocol vulnerability is similar to a March 2022 attack, with the same bug recurring.
The decentralized finance (DeFi) platform LI.FI protocol has suffered an exploit amounting to over $8 million.
Cyvers Alerts reported detecting suspicious transactions within the LI.FI cross-chain transaction aggregator.
LI.FI Issues Warning After $8 Million Exploit
LI.FI confirmed the breach in a statement on July 16 via X: “Please do not interact with any http://LI.FI powered applications for now! We’re investigating a potential exploit.” The team clarified that users who did not set infinite approval are not at risk, emphasizing that only those who manually set infinite approvals seem to be affected.
According to Cyvers Alerts, more than $8 million in user funds have been stolen, with the majority being stablecoins. According to on-chain data, the hacker’s wallet holds 1,715 Ether (ETH) valued at $5.8 million and USDC, USDT, and DAI stablecoins.
Cyvers Alerts advised users to revoke relevant authorizations immediately, noting that the attacker is actively converting USDC and USDT into ETH.
Crypto security firm Decurity provided insights into the exploit, stating that it involves the LI.FI bridge. “The root cause is a possibility of an arbitrary call with user-controlled data via depositToGasZipERC20() in GasZipFacet, which was deployed 5 days ago,” Decurity explained on X.
“In general, the risks behind routers, cross-chain swaps, etc. are about token approvals. Raw native assets like (unwrapped) ETH are safe from these kinds of hacks b/c they don’t have approvals as an option. Most users & wallets also no longer do “infinite approvals” which gives a smart contract total control on removing any amount of their tokens. It’s important to understand which tokens you’re approving to which contracts.
This dashboard looks for all transactions of a user that intersects Lifi. Not all of these transactions indicate risk- but you can see how, broadly, integrations & layers of tech (like how Metamask bridge uses Lifi on BSC) can complicate how users do or don’t put their assets at risk. Revoke Cash is the most well known approval manager app.
But it’s also good security practice to simply rotate your address. New addresses start with 0 approvals, so starting fresh by moving your tokens to a fresh address is another good security practice.” – commented Carlos Mercado, Data Scientist at Flipside Crypto.
Recent Exploit Mirrors March 2022 Attack
Further analysis by PeckShield alert revealed that the vulnerability is similar to a previous attack on LI.FI’s protocol that occurred on March 20, 2022. That incident saw a bad actor exploit LI.FI’s smart contract, specifically the swapping feature, before bridging.
The attacker manipulated the system to call token contracts directly within their contract’s context, making users who had given infinite approval vulnerable. This exploit resulted in the theft of approximately 205 ETH from 29 wallets, affecting tokens such as USDC, MATIC, RPL, GNO, USDT, MVI, AUDIO, AAVE, JRT, and DAI.
“The bug is basically the same. Are we learning anything from the past lesson(s)?” PeckShield Alert said in a July 16 X post.
Following the 2022 incident, LI.FI disabled all swap methods in its smart contract and worked on developing a fix to prevent future vulnerabilities. However, the recurrence of a similar exploit raises concerns about the platform’s security measures and whether adequate steps were taken to address the vulnerabilities identified in the previous breach.
LI.FI is a liquidity aggregation protocol that allows users to trade across various blockchains, venues, and bridges.
