Annuities Gain Favor Amid Stock Turmoil
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Here's your Money Briefing for Thursday, July 21st. I'm J.R. Whelan for The Wall Street Journal. 2022 has been a rough year for people's stock portfolios and their 401ks. Now, losses from the market turmoil, along with higher interest rates, are causing investors to pour record amounts of money into what many see as a safer investment, but one that many people know little about, fixed-rate annuities.
It works as a savings contract. It is an annual interest rate it promises to pay you. And it's going to pay that per year. And then at the end of that period, you're going to get your money back. You'll get your principal and your interest.
Coming up, we'll check in with our insurance industry reporter, Leslie Sism, for a little Annuities 101, how it could fit in with your other investments, and some risks to watch for. That's after the break.
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What is driving the recent surge of cash into fixed-rate annuities?
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The steep ups and downs in the stock market are leading many investors to seek alternative ways to protect their money, and many are turning to a type of investment that doesn't always grab the spotlight, annuities. So how do they work, and why are they considered safer than investing in stocks? WSJ insurance industry reporter Leslie Sism recently wrote about the newfound popularity of annuities, and she's with us now. Leslie, thank you so much for being with us.
Oh, thank you. My pleasure.
So first of all, Leslie, boil this down for us for a moment. What is an annuity, and how does it work?
It works as a savings contract akin to a bank certificate of deposit. You will hand over a lump sum to a life insurance company. The life insurer then will invest that money, typically in bonds, typically high-quality bonds. The life insurer then promises to return the your principal with a specified amount of annual interest to you at the end of the period specified in the contract. These are called fixed rate annuities. They're not variable rate. So the contract specifies a fixed rate of interest per year. Three to five years is typically what consumers like. They can go as short as one year. They can go seven or even longer years. The insurance company then has a fixed rate. It is an annual interest rate it promises to pay you.
And it's going to pay that per year. And then at the end of that period, you're going to get your money back from the insurance company. You'll get your principal and your interest.
All right. So who are annuities typically geared toward?
How does a fixed-rate annuity actually work and who issues them?
Annuities typically are favored by older people, and by older, I mean folks in their 50s all the way into their 70s. At New York Life and some of the other life insurers I spoke with, the typical buyer is putting $150,000 into one of these contracts. So you can see it's not typically something that a young person goes for. Young people often will have more of their money in stocks. They want to get the capital gains, the growth from these stocks, whereas older people are starting to put larger parts of their portfolios into safer investments.
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