If you’ve ever looked into annuities, you’ve probably wondered: Are they actually safe? Back when I started in the annuity world, one of my colleagues (who had decades of experience) used to say: There are 5 reasons to purchase an annuity:
- Safety
- Safety
- Safety
- Safety
- Safety
While that may be a bit overstated, annuities are considered one of the safest financial products available. In plain English: annuities are designed with multiple layers of protection. Here are four of them.
Reserve Requirements – Insurance Companies reserve for future benefits. That means they must place their funds into investments that cover the future guarantees of your contract. For example, if you purchase a 5-year MYGA (Multi-Year Guaranteed Annuity), the insurance company typically invests in high-quality bonds and other assets designed to match the timing of that guarantee. This is why there are surrender charges if you decide to cash in early. They would need to liquidate those investments early so you can take your money out.
State Oversight – Insurance companies are regulated at the state not federal level. Most state insurance departments follow the reserve requirements established by the National Association of Insurance Commissioners (NAIC). These regulations provide insurance companies with conservative formulas on which to base their reserves. If a company’s financial cushion drops below the regulatory threshold, the state will take action up to and including ordering the company to stop selling new policies until the reserves meet the published guidelines.
Third Party Tracking – Insurance companies, like many other financial institutions are rated by third party organizations like AM Best, Standard and Poor’s, Moody’s, Fitch, and many others. These ratings can help you compare and evaluate insurance companies.
One note about ratings. The importance of a company’s rating varies depending on the type of annuity you are buying. If you are in the market for lifetime income, you want to be sure the company will be around for your lifetime. If you are in the market for a shorter term, like a MYGA, you still want to make sure the company is stable, but high ratings are not as much of a concern. You can look at it this way: If you are setting up lifetime income you are marrying the insurance company. If you are buying a MYGA you are only dating the company.
State Guaranty Fund – As a final layer of protection, each state has a state guaranty fund. These organizations come into play as a last resort. If an insurance company doesn’t have the reserves to pay future obligations, the state guaranty association will step in and help uphold the company’s obligations up to a specific maximum. It’s important to note that guaranty associations are not the same as FDIC insurance, and coverage limits and rules vary by state. Each state has its own coverage limits, but most cover up to $250,000 per person, per company. You can check your state’s coverage limits and find out more at NOLHGA.com.
Annuities are built on layers of protection designed to give you peace of mind. From strict reserve requirements to your state’s guaranty funds, the system is structured to stand behind your money for the long haul.
That said, safety doesn’t mean no trade-offs. Annuities are designed for long-term goals like retirement, and they may limit access to your money in the short term. They’re generally best suited for individuals who have other liquid assets available for everyday expenses and unexpected needs.
It’s also important to understand that fixed annuities are not stock market investments and do not directly participate in market gains or losses. And like any insurance product, the guarantees they offer are backed by the claims-paying ability of the issuing insurance company.
The best way to know if an annuity is right for you is to have a conversation. If you’d like help understanding whether an annuity fits your situation, we’re happy to talk. Call us at 888-736-2396 or book a call.
