Annuity FYI Blog

Ratings company A.M. Best has shown concern lately over marketplace happenings that may push them to downgrade some ratings.  Due to the government’s arguing over the debt crisis and many weak European economies, the U.S. Life/Annuity sector may have its rating downgraded to negative from its current rating of stable.  The Insurance Networking News article “Possible Revision to Rating Outlook for U.S. Life/Annuity Sector” explores the consequences of the ratings.  Life insurance companies’ stability are being individually reviewed to see what happens to their risk-adjusted capitalization during times of economic stress.  Some companies are more affected than others by the debt crisis and the falling European economies.  Those companies who show a higher decline and those with a large amount of domestic and foreign sovereign credits may see their ratings decline.

The biggest stressors right now in the U.S. Life/Annuity sector are uncertainty in the global markets, higher volatility in the equity markets, a continuous weak real estate market, and unemployment coupled with low consumer confidence.  Insurance companies are having a harder time increasing their revenues and earnings.  Products like equity linked cds, fixed indexed annuities, and more are affected by the changing markets.  While A.M. Best believes that raising the debt ceiling will help the financial markets’ stability in the short term, they think that other long term solutions are necessary.  However, A.M. Best does acknowledge that many companies are being proactive to ensure their capital is protected, their portfolios are lower risk, and they are positioned for growth.  If the annuity ratings outlook is downgraded, most insurers hope that their actions toward market protection will keep them positive.

Certificates of Deposit, or CDs, are investments that offer you a payout after a fixed term, usually around five years.  The U.S. Securities and Exchange Commission offers this information on their website.  Equity linked CDs base your interest on a specific stock market index, so you have the potential for significant gains.  While you have the risk that you won’t get any gains, you don’t have to worry about losing your principal.  Your initial investment is guaranteed by the financial institution with which you invested.  The protection of FDIC insurance is a big reason why many people choose an equity linked CD as an investment.

There are a number of options and terms to understand when you compare equity linked CDs with other investments.  A liquidity risk is associated with the investment, so make sure you will not need the money before your specific term is up.  Not only will you likely incur penalties if you withdraw your money early, because of market risk you may receive less than your initial investment if you take the money out too soon.  Check to see if there is a call risk associated with your equity linked CD.  If so, a called CD may yield you less if it is called before your term is up.

FDIC insurance should cover your equity linked CDs original investment and interest.  Always make sure that there are no limits to the FDIC insurance for your particular investment.  Check into how your return is calculated because may products take averages into account rather than the exact closing price of your stock market index on the date of maturity.  This could be to your benefit in a declining stock market.  Be aware of your participation rate and any caps on your return.  If your participation rate is not 100%, you will get less than the actual stock market return when your return is calculated.  The same goes for any cap on your interest rate.  Even if the market increases 20%, if your cap is 10%, your gain will be 10%.  Equity linked CDs have different tax consequences than an annuity or other investment, so talk to a tax specialist about how that might affect you.

During the first quarter of this year annuity rates increased by 6%, according to the Annuity News Journal.  Henry Steelman’s article, “Annuity Rates Jump 6% in 1st Quarter,” says that this significant increase is just another reason that investors should look into annuities.  It is a great time right now to look into investing in annuities for those purchasing retirement plans and those looking for a way to finance their retirement.  Since annuity rates are high right now, it is a great time to transfer 401k annuities and other savings plans to traditional annuities.

The aging populations in America and Europe are likely to cause annuity rates to decrease again.  The article points out that it is strictly a case of supply and demand.  As people get older they are more likely to look to annuity products for a lifetime stream of income.  The more people searching for annuities, the less banks are willing to pay out in annuity rates.  MGM Advantage specializes in retirement plans and has been offering annuities throughout the recession.  Their director forecasts a decline in annuity rates and suggests looking into alternate retirement options if you don’t plan on taking advantage of increased annuity rates now.  Equity linked CDs and certain mutual funds can be good for investors as well.  Speak with an expert to find out if annuities are the right investment for your future.

There are too many Americans who are not considering the effects of inflation in their retirement planning, according to “How to keep inflation from ruining your retirement,” published in The Statesman.  In fifty years inflation has caused the median home price in the United States to go from $11,900 to $170,000.  Experts predict that fifty years from now you may not even be able to buy a car for that same $170,000.  That is why it is so crucial to account for inflation when planning your retirement, whether you are investing in equity linked CDs, annuities, or another product.  Nearly 3/4 of those retiring early consider inflation, but that number drops to just over half when you account for all retirees.  It is excellent that so many Americans and their advisors are working rising prices into retirement planning, but there are still too many people that aren’t.

For a basic explanation, inflation trends show a 3% yearly increase in prices.  If that trend continues, in ten years a retiree will pay $13 for something that costs $10 today and in twenty years they’ll be paying $18 for the same product.  Without accounting for inflation when retirement planning, that retiree will run out of money much faster than they might have anticipated.  There are some investments and steps to take to protect yourself from inflation and longevity risk.

Treasury bonds that are adjusted for inflation, such as TIPS, can be a good investment because you receive more income as the Consumer Price Index increases.  For those nearing retirement, an immediate annuity with an inflation rider is another good way to protect yourself.  Your monthly lifetime payments will increase by a specified amount yearly to account for inflation.  Wait as long as you can to start collecting Social Security because the delay could increase your yearly benefit dramatically as prices and interest rates increase.  By investing in equities, such as equity linked CDS, indexed annuity products, and others tied to common stocks, you can help avert inflation risk.  It is also important to manage interest rate risk in your investments when planning for retirement.  Speak with an expert to help manage your inflation and interest rate risks.

Equity linked CDs are like a combination of traditional CDs, or certificates of deposit, and stocks.  According to Money-Rates Columnist Richard Barrington, equity linked CDs are somewhat of a hybrid between the two products.  In a volatile stock market investors can either lose a ton of money or manage to buy low and grow their wealth significantly.  Investors looking for a bit of the best of both worlds may be interested in equity linked CDs.  They offer investors the same stability of traditional CDs because they are FDIC insured and guarantee your principal as long as you hold them to their maturity date.  Since equity linked CDs are also tied to a specific stock market index, investors receive part of that index’s return over the period they held the CD.  While it seems like you are getting the best of both worlds, there are terms with each equity linked CD of which to be aware.

The author states that there are five factors you need to look at when you compare equity linked CDs.  The investments can be tied to many different equities, so you should look for one tied to the specific index with the type of return you are seeking, for example the S&P 500.  You want to get a participation rate as close to 100% as possible because that rate dictates what percentage of the actual market return you will receive.  Some equity linked CDs have a cap on the amount of money they will pay out to you as a return, so make sure you only purchase one with a cap in which you are comfortable.  Check into how your gain will be calculated because some are averaged and can lessen the amount of your return.  Make sure that FDIC insurance will cover the entire amount of your investment when you have a significant amount of money to spend.   Fixed indexed annuities are a similar type of investment, but there are some tax benefits to the annuities.  Both products are definitely worth investors checking out.