Annuity FYI Visitor Blog

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.

A year and a half long battle between the SEC and insurers is over, at least for now.  According to Arthur Postal’s “Appeals Court Vacates Rule 151A” in the National Underwriter, the SEC will have to go back to square one if they want to propose another Rule regarding the indexed annuity.  The SEC hoped to use Rule 151A to classify indexed annuities as securities rather than insurance products.  This would allow them to have jurisdiction over the products along with insurance regulators in each state.  But a panel of three judges in the appeals court has sided with insurers who want them to remain insurance products since they are backed by the insurance companies and there is no risk of losing investors’ principal.

If the SEC decides to propose a new Rule, they will have to show what effect such a rule would have on efficiency, capital formation, and competition in the industry.  Currently, the SEC says that they will do more research and wait to decide if they will begin another battle with insurers over indexed annuities.  Insurance companies believe that these are some of the best annuities for their clients and are relieved that Rule 151A has been dropped.  They think that agents and companies will be much better suited to handle indexed annuity products than the SEC and that they are far from being the equivalent of securities.  We’ll have to wait and see if the SEC decides to bring this issue up again.

In Money Magazine’s Ask the Expert section, Walter Updegrave advises a couple to “Bridge income gaps with an annuity.”  While they asked him how much of the husband’s 401k should be transferred to an annuity, there wasn’t quite an easy answer for that since everyone’s situation is different.  The most important thing to do when considering your annuity purchase for retirement is to figure out how much you’ll need to cover after factoring in your pension/s and your social security payments.  You’ll have to determine how much income you will need in retirement and compare that with the income you’ll have coming in from pensions and social security.  Whatever extra income you need to cover can be met with the guaranteed lifetime income of an annuity.

The author recommends the use of immediate annuities to bridge this gap, although there are numerous types of annuities to choose from.  Your best bet is to speak with an expert and find out which type of annuity will work for your specific needs.  Immediate annuities pay you guaranteed payments over you or your spouse’s lifetime in exchange for an upfront lump sum payment to an insurance company.  Your payments are based on your age and the current interest rate.  Since rates are typically low right now, it could be in your benefit to purchase your annuities over the next few years instead of all right now.  Many people are purchasing a variable annuity with a guaranteed lifetime withdrawal benefit for a similar retirement purchase.  While they may not work for everyone because of the fees and guarantees associated, the products can be another successful retirement annuity.

A strong debate over who should oversee equity indexed annuity products has been going on since the SEC introduced Rule 151A in 2008.  According to Investment News’ “Indexed-annuities amendment: Insurers yea, advisers nay” by Mark Schoeff Jr. and Darla Mercado, the debate between sides will remain even if this amendment makes a final decision.  Regulation of equity indexed annuities will remain in the control of individual states if the bill passes, instead of transferring to the SEC as they had hoped.  The products will be classified as insurance products rather than securities.

Insurers are happy that the annuities will remain out of the hands of the SEC, while advisers would have preferred the latter.  Allianz Life, the National Association of Fixed Annuities, and the National Association of Insurance Commissioners support the bill keeping the regulation of equity indexed annuity products at the level of the state insurance commissioners.  While Democratic leaders hoped that the products would be regulated by the SEC, most rank and file Democrats voted with Republicans that the control should remain with state insurance commissioners.

The advisers who don’t agree with this bill believe that consumer protection against abusive sales representatives targeting vulnerable people will be compromised.  They believe that FINRA and members of the broker-dealer world have more knowledge to regulate a product tied to securities.  Because of past problems with equity indexed annuities, the National Association of Insurance Commissioners has put new suitability standards on the products believing that will help get rid of shady sellers.  There is also a concern in the government that taking away the state regulation of these products will force smaller insurance companies and individual agents out of business, leading to increased unemployment.  The debate rages on until the final bill is signed by the President.