How Safe is an Annuity?
When it comes to making sense of annuities, get ready for a whirlwind ride if you are using the Internet to learn about safety and long term implications. The convergence of a thousand organizations online each sharing their own biased philosophies makes it harder than ever to sort out solid planning advice from the fear techniques being used to convey counter selling points.
What makes matters worse are the sometimes confusing explanations often written about annuity products, conveying the same tired definitions that were meant to discourage the use of them in the first place. Ranging from contract guaranteeing payments to annuitant, to insurance policy that surrenders your assets, to provision for accumulating contributions, it is a wonder that nearly 70 million people benefit from annuities daily in the US alone.
A lot of the confusion is down to pure competitive economics. Stock wizards want you to ride the elevator of wealth up and down (so they can get their brokerage fees). Banks want you to purchase CD products for safety (so they can make money by loaning yours).
Money managers want you in and out of funds to maximize gains (so they can qualify for fees every time they handle your assets). The last thing any of them want you to do is to tie up your savings in a long term retirement vehicle that prevents their own biased upsides from occurring.
Enter the Internet where anyone can be anything, and nearly half the articles and recommendations you'll find concerning annuities are incorrect at best.
Most Annuities are Safety-First Investments
From a risk tolerance and safety perspective, most annuities can be boiled down to two simple categories for consideration:
Type A (Safety First) - These include retirement based annuities that provide tax deferred benefits, long term growth, guaranteed interest rates, probate protection, trust advantages, and lifetime income benefits, and guarantee the security of principal and earnings over the lifetime of your annuity. Your options range from fixed, immediate, split, and equity indexed annuities, and are utilized by individuals who insist on no loss at any level for their accumulated assets.
Type B (Growth First) - Type B includes variable annuities, which allow you to get many of the benefits above, and utilizes subaccounts for investments made in stocks, bonds, money market instruments and securities. A variable annuity provides more growth opportunity and direct control than other annuities, but the potential for risk to your earnings and principal can be a very real concern for individuals who have low or no tolerance to risk.
The challenge some seniors may face is that in depressed market times, their retirement savings may not outperform the rate of inflation, or their total lifetime accumulations may not be adequate to provide an income that ensures they don't outlive their savings. In such instances, some financial planners may recommend more aggressive investments as part of your accumulation strategy, although risk should never be a substitute for intelligent long term planning.
So How Safe Are Insurance Companies?
As you probably already know, annuity products come from insurance companies, who can be evaluated through a number of factors relating to their reputation, strength, reserves and historical performance. The annuity itself though is hardly a new thing, getting its origin during Roman times when citizens would make a one-time payment in exchange for a lifetime of payments - similar to the immediate annuity.
With use by governments across Europe and the world for many hundreds of years, it wasn't until the Great Depression in the late 1930s that annuities really caught on in the US. With turmoil and uncertainty in the financial markets, insurance companies providing annuities were seen as stable institutions that could make good on the payouts they promised.
Since then the annuity has evolved a great deal to meet consumer needs, and insurance companies have become a vital foundation for the security and well-being of our country. Employing more than 2.2 million people in the US alone, insurance companies provide protection for our children through life insurance, guarantee healthcare if we are ever in an automotive accident, insure the contents of our homes, protect our businesses, and shelter millions of people from the damage and costs of unexpected events every month.
While the federal government can simply print more money to cover unexpected losses in the private banking sectors, they impose unwavering regulations on the operation and activities of insurance companies. The legislation governing insurance companies is designed to provide absolute protection, as federal law requires them to hold a reserve that at all times equals the withdrawal value of your annuity policy. In addition, state law also requires surplus capital be available to increase your protection, as well as contributions to state guaranty funds that provide additional security in the event of unforeseeable problems.
The smartest moves you can make to maximize the safety and relevance of your retirement plan is to ensure you deal with a knowledgeable financial advisor who can provide independent and objective advice, buy only from reputable companies with strong performance history in annuities, and never agree to anything that concerns your retirement security that you don't fully understand.
Visit our online guide that includes questions you should ask your financial advisor to ensure you get the most from any annuity you are considering.