How Safe Are Annuities?

However, annuities have historically proven to be one of the safest vehicles for your earnings.  They offer the best way possible to diminish the long-term risk, and financial advisors are able to take the necessary steps to protect their clients from potential financial issues facing the insurer.

As with any financial decisions, it is important to fully understand the implications involved when deciding on the best course of action to take in order to protect your investments.  This article will discuss some key points that you need to be aware of prior to making a decision to purchase an annuity.

COMDEX Score

First, make sure that your qualified agent is familiar with the current listing of COMDEX scores for insurance providers.  If your agent is unfamiliar with COMDEX, find another agent.

Simply put, COMDEX is a composite of the average ratings for an insurance carrier provided by different rating services.  The formula scoring system ranges from 0 to 100, with 100 equalling a perfect score.  For example, if an insurance carrier has a COMDEX of 90, then it is interpreted that the insurance carrier is rated 90% higher than other insurance carriers.

Understanding Rating Services

The primary rating agencies that cover insurance companies are A.M. Best, Fitch, Standard & Poors, Moody’s, and Weiss.  As mentioned before, the COMDEX scoring system is the best indicator of a company’s financial fitness because it’s a combination of scores among the differing rating services.  If the COMDEX rating is not available, the ratings of the individual rating services will be adequate enough to guide you through the process of selection.

Knowing the accurate ratings from reporting agencies regarding the financial wellness of the insurance company you use is a safeguard that affords you early detection should your carrier experience financial distress.  This allows you ample time to reposition your investments in the rare event that the highly-rated carrier that you use suffers financial hardship.

Annuities are Protected by a State-Guaranteed Fund

Annuities are not regulated or supported at the federal level, but at the state level.  It is important that you visit the National Organization of Life & Health Insurance Guaranty Associations website to determine what your specific state guarantee dollar amount is.  If you find that you have significant concerns regarding the safety of insurance carriers, but you still would like a guaranteed annuity, consider purchasing annuities within your specified state dollar guarantee limit and spread your investments among more than one carrier.

Insurance companies selling fixed annuities are required to become members of their state’s guaranty association in order to conduct business in their state.  Each states’ guaranty association is responsible for obtaining funds for their enterprise and for the payment of claims.  The claims are paid by assessments made against the state-licensed insurance companies and from the recovered amounts paid toward claims of a financially ruined insurance company.

How Safe are Annuities? Check the Carrier Balance Sheet

The majority of insurance companies will produce their balance sheet and fixed-income holdings, which in essence will support their annuity policies.  If the carrier is publicly traded, this type of information is available by contacting the insurance company’s investor relations department.

It is required for insurance companies to demonstrate to state regulatory authorities that their client’s premiums are safely deposited into secure financial investments such as government or investment-grade bonds.  Additionally, they are required to keep surplus reserves to effectively serve their clients regardless of financial issues.  The minimum amount required to be designated as a surplus reserve is based on the investments’ safety as seen fit by state regulators.

Based on these rigorous requirements, insurance companies are investigated and mandated by law to meet and sustain a legal reserve for the security and safety of their policyholders.  Now that you are aware of the resources to utilize when conducting your annuity research, you need to understand some of the bad, but common sales practices used when considering purchasing an annuity.

1. Providing only one rating

Often, a life insurance provider might have an “A-” rating from one agency, while other rating agencies have awarded them less than an A.  This is where the COMDEX score serves its purpose by being a compilation of ratings from all reporting rating agencies.  The COMDEX prevents agents from cherry-picking the annuity that they want you to select.

2. Using the State Guarantee Fund as a selling point

According to the National Association for Fixed Annuities (NAFA), most states have an advertising ban within their insurance laws that states that insurance companies and agents may not use the state-led guaranty association for the purpose of sales, solicitation, or as an introduction to purchasing insurance, including annuities.  Insurance agents can lose their license if they are caught.  Do not allow your insurance agent to make an incorrect comparison – your state guarantee fund is not FDIC.

3. Recommending only one product or carrier

Aggressive online annuity promoters easily go above and beyond in the selling or promotion of their one annuity product, despite stating that they represent multiple carriers.  It is important that you ask to receive quotes from 3-5 different insurance carriers that properly and legitimately help you to reach your goal or solve your specific situation.

4. Investing too much or all of your assets into an annuity

It is all too common for some insurance agents to invest ALL of your earnings into an annuity.  In the majority of situations, this is just not reasonable or appropriate.  If this is the recommendation of the agent you are using, consider finding another agent.

We are unable to predict with accuracy the financial status of the insurance industry 20, or even, 30 years into the future so it can be difficult to guaranty how safe annuities really are..  However, most financial advisors do not see any clear indications that annuity owners should fear serious problems in the future for the insurance industry.  In reality, no retirement decisions are completely free from risk.  Considering all possible risks, annuities are still comfortably recommended.