How Safe are Annuities?
Analysis of the safety of annuities
Annuities have always been viewed as a safe investment option particularly for clients who are most concerned with securing their retirement returns. Life insurance carriers have been issuing annuities from all the way back to the 19th century. From that time, even during the most difficult economic eras such as the Great Depression, no annuity owner or beneficiary has ever lost a dime of their premium. Life insurance carriers have constantly been assumed to be the sturdiest of all our fiscal corporations, and, while there have been a a small number of instances where carriers waver on liquidity, the life insurance business has always taken care of its own by picking up or buying up troubled companies.
All of that considered, times have changed. After all, it took the central government to save one of the major insurers in the planet (AIG) which has billions of annuity policies. Then, when economic beasts like Lehman Brothers can fall short, we just might be living in the nastiest of financial times. With life insurance stock prices spiraling down in recent market deflations, wasn’t the clock just ticking before a life insurance carrier flopped? It’s not extremely likely which is why annuities are still viewed among the most secure investments in the market.
While there are a million reasons to be cautious in this turbulent economy, when all variables are considered, and every aspect of the fundamental safety of annuities are completely investigated, it remains that annuities offer the maximum degree of security of any investment.
Various factors of annuity security
State guarantee relations
Annuity detractors often point to the idea that they don’t hold the same shield as do bank CDs because their deposits aren’t federally insured. The truth is that annuities deposits are given government insurance in the structure of state guarantee associations. Each state has its own insurance section for purposes of policing the carriers that operate inside its borders. Moreover, all states have recognized a state guarantee association which is paid for by the life insurance carriers. If an insurer becomes unable to repay their policies, the state guarantee funds are made available to cover its claims up to $100,000 (the quantity differs by state).
The legal reserve system
The legal reserve system was created to make sure that life insurance carriers put away enough reserves to take on all of their prospective claims. Dissimilar to banks, which might only be obligated to have 10% of its assets in reserves, life insurers, depending on their fiscal condition are mandated to keep as much as 90% of their assets in reserves. Some states have made it as much as 100%. Life insurers are inhibited from investing these reserve assets in any product that is government securities and high grade bonds. Solely those carriers that completely conform to the lawful reserve expectations of their state are granted the state of a “legal reserve life insurance company”.
The ability to “reinsure”
When a life insurer takes on an exceeded amount of risk, such as when they write a high risk life insurance case, they “vend” the risk to a different life insurer. This stops any liability of risk in any one carrier which could put tension on its reserves. Some insurers concentrate in reinsurance and are constantly available to soak up a high risk case. In a number of states, there are criteria that any life insurer is required to act as a reinsurer in order to make sure that there is a market for high risk cases.
Another obligation that life insurers must stick to within their state is surplus which is quantity of assets that go beyond liabilities. Each state has its own obligations and they can apply various percentages that are related to the fiscal condition of the carrier. Many life insurers set elevated surplus requirements for themselves as a method of exhibiting their fiscal strength.
Examinations done by the state
All life insurance carriers are accountable to an annual audit by their state insurance examiner. All features of the insurer’s fiscal condition are methodically investigated and if there have been any unfavorable alterations from one year to the next, the state may regulate the insurer’s legal reserve and surplus requirements.
Advice to the annuity novices
Purchasing an annuity is a huge decision. Internet research is a good quality start, but cautious investors ought to discuss every one of their options and risks with an independent financial consultant. Ask for a no-obligation consolation, along with a report of current rates on brand-name annuities.
These factors of annuity security have been the main proponents in why no annuity contract owner or beneficiary has lost their premium since they have been sold by life insurance carriers in the United States. As much reassurance as you could obtain from this, it is still vital to cautiously examine the economic potency and integrity of a life insurer before making any deposits with your money.
All of these invigorating variables along with the total investigation of a life insurers financial prospects are calculated and weighed by independent ratings agencies such as A.M. Best, Standard & Poor’s, Moody’s. Carriers that have been given at least an ‘A’ rating are viewed as fiscally protected.
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