Annuity FYI Blog

Equity linked CDs can be a safer and lower-cost alternative to equity-indexed annuities for some investors.  In the recent PR Web press release “Equity-Linked Certificates of Deposit: The Safer Low-Cost EIA Alternative,” Jeffrey Voudrie’s article from Guarding Your Wealth is summarized.  Equity linked CDs have the benefits of FDIC insurance protecting your principal along with the ability to participate in market index upswings.  While an equity indexed annuity is advertised to seniors and can be good a product for some investors, they also pay high commissions to advisors and there is a higher chance for abuse of investors.

This author believes that the equity linked CD criteria allows the product to offer the benefits of equity-indexed annuities without the drawbacks.  Banks sell the CDs, whose return is linked to one of the stock market indexes.  They are FDIC insured and while most have a minimum investment of $25,000, you can find $1,000 minimums if you look.  Taking your money out before your term ends is the only way that your principal could be lost.  You would also face a penalty in that instance, so it is best to keep your money in over the term course.  Most investments are short term, around three years.  Equity linked CDs can be a good investment for you, so see what you can find out there.

A.M. Best Co. changed the U.S. life insurance and annuity sector rating to ‘stable’ from ‘negative’.  This information comes from the Insurance and Financial Advisor article “A.M. Best upgrades life/annuity sector’s outlook to ‘stable’,” by Bob Graham.  In A.M. Best Co.’s opinion, the industry has sufficient capitalization to operate and even deal with added stress.  After downgrading the industry’s ratings in 2009 because of financial impairments in the insurance companies, they believe that the industry will continue with moderate growth moving forward.

This industry has taken quite a hit since the end of 2008, both from the world’s economic problems and A.M. Best Co.  A declining real estate sector, an increase in unemployment, low interest rates like fixed annuity rates, decreased consumer spending, and debt and credit problems factored into lower ratings.  As insurance companies have improved their balance sheets, lessened the risk they take on, and moved in a favorable direction with regards to credit spreads and financial impairments, A.M. Best Co. recognized these improvements.  While they recognize that the industry will continue to face challenges, they believe that the worst is over and the life and annuity industry is stabilized.

Look into the five financial ratings companies when you want to purchase annuities or life insurance policies.  According to “Use ratings when considering annuities, life insurance,” Claire Schwemlein of the Chillicothe Gazette explains the importance of these ratings.  By knowing an insurance company’s financial strength ratings, you are better able to determine their ability to make good on your annuity and life insurance promises.  Whether you have purchased a death benefit annuity or some other type, your guarantee is only as strong as the financial paying abilities of your insurer.

The five financial ratings companies are Standard & Poor’s, Fitch, A.M. Best, Moody’s, and Weiss.  Each company has its own way of rating insurance companies, but they take into account debt, historical customer payments, their current ability to pay claims, financial figures, and investment portfolios.  Their financial strength ratings can be the determining factor on whether you are paid out the full value of your fixed annuities or life insurance policies.  While financial strength ratings are very important, you should also research the company’s customer service abilities and the costs associated with the annuities or other policies you are looking into.  Insurance companies have to pay the ratings agencies to rate them, so it is possible that your insurer isn’t rated by all or any of the firms.

One of Canada’s largest insurance companies, Sun Life Financial Co., is working to expand their U.S. business.  According to The Boston Globe article “Sun Life broadens its horizons in US,” Todd Wallack says that Sun Life is in the midst of a huge nationwide advertising campaign.  Wallack interviewed the head of Sun Life in the U.S., Wes Thompson.  Their U.S. unit is based in Wellesley, MA, employs more than 1,800 people, and serves millions of customers in the U.S.  Sun Life’s biggest products are group life insurance and annuity products.  They hope to grow their U.S. business by double digit gains.

Now is a good time for Sun Life to advertise because costs are low and there are many fewer financial companies on the airwaves than there were two or three years ago.  They have already increased the number of people who know of their company from 4% to 16% of those surveyed.  While group life insurance is their largest segment of business, Sun Life sells many annuity products as well.  President Wes Thompson defended the typical higher costs of variable annuities due to their array of guaranteed riders like death benefits.  He said that they all comparable to the costs and benefits of other industry products.  And while Sun Life moved away from selling fixed indexed annuities because of the general impressions of that business, he does believe that there are good products out there.  Unfortunately, some bad companies had products charging too much in commissions with too high of surrender periods.  Sun Life believes in the life insurance and annuity products they sell and are happy to introduce their company to Americans.

Many Boston Globe readers have an increased interest in purchasing an immediate annuity, according to Humberto Cruz’s “When you buy can affect how much you will pay for an immediate annuity.”  Immediate annuities turn a lump sum payment into a stream of income you’ll receive over your lifetime.  They are attractive right now with a still volatile stock market.

As interest rates remain low, the price of an immediate annuity is higher than it would be at a time of higher annuity rates.  You have to spend more of your money to get the income needed for your monthly payouts.  Annuity prices are also based on your age and gender, since the longer you are expected to live you will have to pay more.

Immediate annuities tend to be relatively low cost and provide stable income for retirement.  An argument can be made for purchasing now and for waiting until interest rates increase.  By waiting to purchase an immediate annuity, you get more for your money even if interest rates do not increase.  That is simply because you are older and your life expectancy has decreased.  By purchasing now, you ensure that you at least get this interest rate in case they go down.  Many advisors recommend “laddering” purchases, or buying smaller immediate annuities every few years instead of purchasing a large one when rates are lower.