Annuity FYI Visitor Blog

A recent press release by A.M. Best announces that they have revised their rating of Nationwide Financial Services to negative. Nationwide’s rating had been stable.

A.M. Best says that the downgrade are is largely due to the fact that the firm’s financial performance is heavily based on the equity markets. Its products include variable annuities and variable life insurance, the former of which has been hit severely by the stock market’s fall. Nationwide’s line of variable annuities is currently garnering negative net flows.

However, there is a silver lining: the company has positive total annuity flows, presumably due to successful fixed annuity sales.

The Retirement Income Reporter recently published an article highlighting New York Life Insurance Company’s selling a total of $1.2 billion of income annuities during 2008. 

• About $850 million was sold through New York Life’s own career agency.
• Over $100 million worth of AARP Lifetime Income annuity programs, which are provided by the company, were sold.
• Another $350 million of annuities were sold through partnerships with banks.

Walter Updegrave, editor of Money magazine, recently wrote about the conventional wisdom of annuities being a safer investment and wondered if that is still true today. He believes that an annuity continues to be a good option, but that you need to keep several guidelines in mind when you compare annuities.

• Number one on your checklist is to make sure that the insurer you buy your annuity from is healthy and solvent. If an insurance company fails, you will lose whatever money you put in it. Purchasing only annuity products with A.M. Best or Standard & Poor’s ratings of A or better will assist you in deciding which insurers are financially strong.
• Walter also suggests dividing your investment into multiple annuities from different companies. Since states provide about $100,000 per insurer from guaranty associations, purchasing from several insurers will hedge your bets in the case that one or more of them fails.
• Ask and receive detailed and clear information about all fees attached to the annuity; including surrender fees, investment fees, rider and guarantee fees, and insurance charges. Understand what the percentages are and when they are due.
• Of course, the best way is to protect your investment is to know exactly what you are buying and to make sure if it’s the right product for you. According to Walter, many guaranteed variable annuities add their promised growth rates to a ‘benefit base’ (that the insurer calculates as a hypothetical amount you’re allowed to draw from an annuity) as opposed to your true account value. Such accounts could result in a nasty shock if you cash out, because you will receive only your actual account value.

Kimberly Lankford from Kiplinger’s has some advice for people who are considering cashing out their variable annuities that have lost money over the past few years: don’t, especially if your variable annuity has an income guarantee. When you cash out a variable annuity with a guaranteed minimum income benefit, you are only entitled to the current value of your investment; whereas if you keep it, you have the right to a yearly withdrawal of your initial investment (or even a percentage of the higher value, if it goes up).

Also, guarantees offered on today’s annuities tend to be far less generous than those offered in better economic times, Kimberly says. Be wary of cashing out if you think there’s a chance you’ll buy another annuity in the future.

Don’t forget the increased taxes you’ll have to pay on the entire annuity value if you cash out, as well as any possible surrender charges. Check with a financial advisor or other trusted source before making these decisions.

In the Wall Street Journal, Anne Tergensen highlighted a new trend in annuities: longevity policies. Unlike standard annuity products, this investment only begins payouts at a certain advanced age (usually 80 or older). When payments do begin, annual payments are higher. As a result, you may be able to maintain a similar standard of living during your golden years. Due to interest compounding, you can amass a significant sum with a smaller initial investment than a regular annuity.

Unfortunately, buying a longevity protected annuity uses up a significant portion of your emergency savings. Also, you’ll lose most of your investment if you pass away before the bulk of the policy is paid out; just like traditional annuities.

These products are currently offered by MetLife, Hartford, and New York Life.