Annuity FYI Blog

We have been updating our Annuity FYI In The News section with a flurry of recent articles related to the the economic crisis, from major financial sources such as Money, Fortune, Kiplinger’s, and The Wall Street Journal.  Everywhere, we see this question raised: Are Annuities Safe Nowadays?

Below we’ve summarized some of the latest articles on the subject.  If these are of interest, click here, and you will be sent an annuityfyi.com Article Request page, where you can request links to the full article texts.

“Is Your Annuity Safe?” — Walter Updegrave, Fortune, December 21, 2008

From the opening statement, “Despite the financial crisis, insurers are meeting their obligations”, this article details the safeguards of the annuity industry in clear reassuring language!

“Should I Dump My AIG Policy?” — Kimberly Lankford, Kiplinger.com, December 2008

Kiplinger.com Contributing Editor Kimberly Lankford discusses reasons not to dump your annuity from the troubled insurer, and what legal safeguards exist to reassure policyholders.

“Are Annuities at Risk Now?… Some Answers”–M.P. Queen, Wall Street Journal, October 28, 2008

M.P. Queen of The Wall Street Journal answers the most frequently asked questions about annuities, such as: What are they? What is the difference between fixed and variable annuities? How have annuities been affected by the financial crisis? What safety features does an annuity investment carry in case of insurer insolvency?

“Is Your AIG Insurance Policy Safe?” — Brett Arends, Wall Street Journal, September 17, 2008

In the wake of the 2008 financial crisis, Brent Arends of the Wall Street Journal offers assurances to insurance company policyholders regarding the safety of their investments, should their provider declare bankruptcy.

• Click here to request links to these articles and their full texts!
• Call an Annuity FYI Expert with any questions–1-866-223-2121 or email us.

An article by Mark Czachowski, which recently appeared in the Effingham Herald, gives a good overview of the similarities and differences between certificates of deposits (CDs) and fixed annuities. While they are both judged to be relatively low-risk investments, neither is for everyone.

A CD is issued by a bank and insured by the FDIC (Federal Deposit Insurance Corporation) for up to $100,000 per depositor. CDs offer lower interest rates than annuities, but are better for short-term investments (one year or less) where early withdrawal penalties would make annuities untenable. Their tax bite is also higher for longer periods of time, because a CD’s interest earnings are taxable in the year they are accrued; regardless of whether or not you take the money out. Unlike fixed annuity rates, in most cases a CD’s rate of return is not adjusted during its lifetime.

In contrast, an annuity is backed by the strength issuing insurance company’s finances, and is not protected by the federal government. Most states have insurance guaranty associations that guarantee at least a portion of your investment, in the rare event that an annuity or life insurance company fails. Still, rating agencies like A.M. Best, Standard & Poor’s, or Moody’s offer evaluations of insurance companies that should be researched prior to buying any financial product.

Annuities are preferable for most long-term investments due to their higher interest rates (resulting in more interest compounding) and more favorable tax status, says Mark. With tax deferred annuities, accumulated earnings are not treated as taxable income until the money is withdrawn. Unlike CDs, fixed annuities are also likely to offer guaranteed minimum interest rates.

In the December issue of Fortune, Walter Updegrade soothes the concerns of some consumers worried about their annuity investments. Despite the struggling financial markets, so far no major life insurance company has gone under. Even AIG’s insurance subsidiaries have remained largely unscathed!

State insurance departments will liquidate an insurer in the worst-case scenario, and your level of protection will depend on the type of annuity you have and how much you’ve invested:

• Variable annuities invest your money in so-called subaccounts that are completely separate from the insurer’s own accounts, and therefore protected from their financial problems and their creditors. Any guaranteed annuities that have been provided are covered by your state’s guaranty association. While insurers are legally obligated to maintain an existing customer’s guaranteed minimum income benefit, make sure to examine your annuity’s prospectus to see if they have the right to increase fees for them. Losses associated with the stock or bond markets in equity-indexed annuities are not covered.
• Fixed annuities are covered by state guaranty associations if a failed insurer cannot afford to cover its annuity policyholders. Most states cover at least $100,000 worth of cash and withdrawals, but amounts vary. Nolhga.com lists coverage limits for each state.

Walter claims that you will recover at least a portion of your money in either case. Not to mention that the taxes and penalties charged for early withdrawal may make it worth it to hunker down, as opposed to taking your money out to avoid the risk.

Of course, it’s always best to speak with a financial advisor or planner yourself before making any important decisions about your investments.

Recently, results from a survey conducted by the AXA Equitable Life Insurance Company was were reported in a press release. The October 2008 study showed that consumers are becoming more conservative with their investments than they were just a few months earlier, in April.

These trends, found among men and women from 35-70 years of age, point towards financial products like annuities having increased appeal. Most significantly,

• A whopping 78% of respondents rank income guarantees among their top financial priorities. Since April 2008, people have been watching their stock portfolios drop; leading to a 16% increase of their interest in less volatile alternatives.
• In October, 71% of the survey respondents gave a high ranking to protection from outliving their retirement savings (as opposed to 59% in April). Women live longer after retirement, so it’s especially important that they don’t run out of money. This is less of a risk with variable retirement annuities, which tend to grow at a certain rate that approximates inflation.

Check with an expert to see what solutions are right for you.

M.P. McQueen from The Wall Street Journal recently reported on the insurance industry’s push for states to lower their required reserve amounts. While the states regulate insurance and annuity products, the recommendations of the National Association of Insurance Commissioners (NAIC) are typically adopted by most states. NAIC may make a decision as early as Friday.

The life insurance industry is adamant that the current reserve requirements are too conservative; as you would expect, that argument doesn’t fly with consumer groups such as the Center for Economic Justice and the Consumer Federation of America. Those groups believe that given the state of the financial markets (largely blamed on lax regulation in the mortgage and investment industries), nobody should even be considering loosening regulatory controls at this moment. Reserves are meant to protect the assets individuals have invested in life insurance policies, variable annuities and fixed annuities. The cash reserves can pay off certain guaranteed policies even during a stock market downturn.

However, having large reserves also reduces the flexibility of insurers. To pay minimum returns on financial products like variable annuities, providers may have two options for freeing up the needed cash: either face the daunting prospect of raising capital on terms unfavorable to the borrower, or selling off assets that are otherwise useful and stand the chance of future success.

The American Council of Life Insurers, an industry group, also contends that high reserve requirements are a waste of funds because replicate other safeguarding measures insurers have enacted. They claim that up to $28 billion would be freed up if the NAIC adopts their proposal for lowering the requirements.