How safe are annuities?

how safe are annuitiesYou may be wondering “How safe are annuities?”

Keep It Simple Answer: Historically Fixed Annuities have been some of the safest places on the planet to keep your money.

Let’s dive into this one a little bit more.

Let’s look at the 4 main types of annuities.

1)      Immediate Annuities

2)      Fixed Annuities

3)      Indexed (Hybrid) Annuities

4)      Variable Annuities

The last one “Variable Annuities” are securities. You invest in mutual funds. There is risk to your principal with Variable Annuities just due to the fact that the underlying investments go up and down with the stock market. We don’t offer variable annuities and this post does not pertain to variable annuities.

So for the sakes of this discussion we will focus on “How safe are fixed annuities?” or the first 3 types.

Annuities are legal binding contracts between you and the issuing insurance company. You are agreeing to deposit money with them, and they are agreeing to provide you with something in return (whatever is outlined in the contract).

Fixed annuities are not bank products, so they do not have FDIC insurance.

You will see the phrase “Guarantees based on claims paying ability of the underlying insurance company” on a variety of annuity documents.

So it makes sense to deposit your money with a sound insurance company. S&P, AM Best, Fitch, Moodys and Weiss are all ratings agencies you can use.

There is also a service called Comdex which takes a bunch of the different ratings and averages them to give you a score. You agent should be able to provide this info upon request. Your public library also has a lot of information.

A big difference between fixed annuities and bank deposits are the reserve requirements. This means the amount of money the institution needs to keep on hand to back up the deposit.

Banks are fractional reserve, meaning they only need to keep a fraction of your deposit on hand. This can often be less than 10 cents on the dollar that the bank needs to keep on reserve.

Fixed annuities have much higher reserve requirements, often approaching $1.00 for $1.00. This means they would have to keep close to $1.00 on reserves for every dollar on deposit. This is a good thing.

Fixed Annuities are not regulated at the Federal level. Each state has its own insurance department that regulates the annuities available in that state.

Also, each state has it’s own State Guaranty Association. This is a department that insures annuity contracts up to a certain level. In Illinois it’s $250,000. Your state may be different.

The funding for the State Guaranty Association comes from the insurance companies themselves, licensed to business in that state, it’s not funded by the actual state government. (Another good thing)

NOTE: It is illegal for an agent to use the State Guaranty Association as an inducement to get you to buy a fixed annuity. That being said, the coverage levels in Illinois are listed here.

Illnois Guaranty Association.  http://insurance.illinois.gov/General/guarantyfunds_facts.asp

For other states you can find your coverage levels here. http://www.nolhga.com/

What happens if the insurance company goes out of business?

One of the biggest safety factors with fixed annuities is that they are marketed as “guaranteed” products, and the companies want to keep it that way.

If a company ran into problems and suddenly there were 1,000’s of people that didn’t get the guarantees they were promised, the whole industry would be in trouble.

There are Billions and Billions of dollars going into annuities every month. These companies can not afford for the promise of “guarantees” to lose it’s value.

So the industry helps itself. From what I have seen over the past 10 years, if some a company gets into a little trouble, another company will go by up their book of business and continue the contracts as is. The only difference you see is a different name on the statement.

It’s rare that it even gets to that point, but that’s what seems to usually happen.

If this doesn’t happen, your last line of defense is the State Guaranty Association which since it’s inception has never failed to pay out, in the rare cases that it gates that far.

So in summary.

1)      You have a legal binding contract with an insurance company

2)      Find one with good ratings

3)      The company by law has to keep a big percentage of your deposit in reserves

4)      If they get into trouble typically another company will buy up their book of business and your contract continues as is.

5)      As a last resort there is the State Guaranty Association. In Illinois the limit is $250,000 per carrier.

6)      If the limits are a concern, then divide your deposit up between multiple carriers

Annuities have been around since the Roman times. Historically they have been some of the safest places on earth to keep your money.

Do you know anyone personally who has lost money because a their fixed annuity company went belly up? If you do, please let me know because I have never found anyone that has. (I’m not talking about surrender charges, I’m talking about actually losing money because an insurance company went out of business”

I know people who have lost money in the stock market, in mutual funds, in real estate and in bank deposits (past the FDIC limits), but I have never met, or heard of someone who lost money in a fixed annuity because the company went under.

 

 

 

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