Lesson #3
Fixed Annuities "Safety Nets"
7 Annuity Strategies of The Wealthy
In this lesson, you'll learn about the multiple “safety nets” you get with fixed annuities.
Even in this unpredictable economy, fixed annuities offered by a reputable insurance company can still provide one of the best safety track records of any financial product over the past 150 years.
Safety Net #1 - Insuring Your Assets
Safety Net #1 - Insuring Your Assets
You insure your other assets, so why not your retirement portfolio? Your house, your car, your health, and your life are all insured so it makes sense to insure your financial future, especially since the safety and income generation of your retirement portfolio is what will allow you to afford the maintenance of all those other insurance policies.
Your principal and interest are contractually guaranteed in writing and backed up by the full strength and claims-paying ability of the insurance company when your money is deposited with a fixed annuity.
Safety Net #2 - Insurance Company Ratings
Safety Net #2 - Company Ratings
The major independent rating agencies scrutinize the insurance companies and rate them based upon their individual criteria. They then assign a Financial Strength Rating (FSR) to represent the company's assessment of an insurer's ability to meet its obligations to policyholders.
The rating process involves both quantitative and qualitative reviews of a company's health including their balance sheet, operating performance, and business profile. It also includes peer review and comparisons to industry standards, as well as assessments of an insurer's operating plans, philosophy and management. The rating is reported as a letter grade.
The ratings scale includes 15 different ratings:
A++, A+ (Superior)
A, A- (Excellent)
B++, B+ (Good)
B, B- (Fair)
C++, C+ (Marginal)
C, C- (Weak)
D (Poor)
E (Under Regulatory Supervision)
F (In Liquidation)
In most instances, when you use an insurance company with a high strength rating, you are backed by a company with assets of billions or trillions of dollars and reserves that may be between 50 and 150 years old.
The major independent rating agencies are Fitch, Moody’s, Standard and Poor’s, and A.M. Best. Founded in 1899, A.M. Best is the oldest of the four rating agencies. It is widely trusted and recognized as accurate.
For the latest insurance company ratings access
www.ambest.com
Safety Net #3 - Insurance Industry Regulations & Reserve Requirements
Individual state insurance departments regulate the insurance companies. The state commissioners' job is to monitor, review and audit internal investment holdings, reserve requirements, and overall strength and solvency of the insurance company. Every life insurance company doing business within the state is required to have more than enough liquid assets to cover the insurer’s current and future obligations.
A local bank may only be required to hold between 5-15% of your deposit in reserves and the remainder can be used and lent back out for profit. But when you deposit with a fixed annuity, the company is required by law to set aside a minimum of $1.04 for every $1.00 of principal that you deposit, so instead of 15% reserved with most banks, 104% of your fixed annuity deposits are held in reserve. Many insurance companies have much more than the minimum reserves.*
Safety Net #4 - Historical Track Record
The North American insurance industry is comprised of approximately 2,000 individual insurance companies that collectively own, control, or manage more assets than all the banks and oil companies in the entire world combined.
If there were ever a financial collapse in this country, it is rumored that the insurance industry would be second only to the U.S. Government to fold, and that is only because the government has the ability to tax and print money.*
The insurance industry has the best strength and stability record of any financial institution over the past 150+ years. It is trillions in the black which highly contrasts to the government, which is trillions in the red.
Babe Ruth, the legendary baseball player, financially survived the Great Depression because the majority of his retirement savings were in fixed annuities. He never lost a dime due to market fluctuation in his fixed annuities, while many of his teammates went bankrupt from the market crash.
Safety Net #5 - Surrender Charges
When investing your money in a fixed rate annuity, you typically commit to a “term” of years, similar to the purchase of a bank CD. And like CD’s, there are usually surrender charges if you were to annually liquidate more than 10% of your annuity balance before your contract matures. Some people cite this as a disadvantage of annuities; but this offers additional safety. Here are the reasons:
1. It prevents a “run” on the insurance company like there have been on the banks. It makes people carefully consider liquidation of their annuity principal ahead of schedule, even in the event of a national crisis. This protects those who do not wish to liquidate as other policyholders of the company. When you liquidate an annuity during the middle of your contract, it forces the company to liquidate an equal portion of their internal bond portfolio within their general account. The company's assessed surrender charge protects the company from taking on losses, thereby protecting the financial soundness and strength of both the company and their policyholders.
2. Surrender charges can help ensure policy holders take the proper time, planning and consideration before moving money around during retirement. This helps guard against impulsive or reckless financial decision-making as dealing with our natural human behavior is paramount when taking a disciplined approach to planning and investing. Most annuities allow more flexibility with penalty-free withdrawals than most bonds and CD’s, which may help allay your concerns about liquidity for emergencies. Of course the most obvious answer is to diversify and refrain from putting all your money in annuities. This is something we discourage, as when you have a properly funded emergency cash account set up and allocated to provide a sufficient amount of cash in case of emergency, investing in annuities which feature surrender charges is perfectly acceptable and can be advisable when you consider the powerful benefits annuities can offer during retirement.
AIG: The Real Story
People sometimes cite the bailout of AIG as a comparison to the rest of the financial services industry and its lack of protection and safety. This becomes their argument against the desirability of fixed annuities and insurance for retirement planning.
The reasoning is that if the largest, A++ rated insurance company in the world can be brought down, so can any other insurance company. When you “pull back the curtain” however, and you understand what really happened at AIG, you may begin to believe (as we do) that the AIG debacle may be an argument FOR the safety of the insurance industry, rather than against it. First, you must remember that AIG was a multi-services financial company, not a pure life insurance and annuity company. AIG had divisions devoted to banking, lending, and brokerage. They carried the same name, but were completely separate entities from the pure life insurance and annuity division.
Fed chairman Ben Bernanke was asked about the problems at AIG in front of congress in March 2009. He told congress that the banking, lending, and brokerage divisions were the heavily leveraged divisions of AIG. These divisions, containing the defaulting sub-prime mortgaged-backed securities and credit default swaps, fell outside the jurisdiction of the New York state insurance commissioner’s regulatory authority.
He also said that the insurance and annuity division within AIG remained the only stable and profitable side of the entire company. He went on to state that the regulatory standard already in place within the insurance industry had prevented the insurance and annuity division from participating in the risky decisions of the other divisions of the company. Bernanke also told congress that the other divisions were not allowed by law to “raid” the huge reserves contained within the annuity division to help cover the the rest of the company's missteps.
If the government bailout of AIG not taken place, it is speculated that the insurance and annuity division would have spun off and began operating under a separate name and entity and the life insurance and annuity policyholders of AIG would have continued to receive uninterrupted service, benefits, and guarantees of their contracts.
