In 2008 during the last financial crisis, annuity companies weathered that storm very well and positioned themselves to take advantage of the demographic tidal wave of baby boomers looking for contractual guarantees. That seems like a blip on the screen to what we are going through today with the Coronavirus pandemic. If there was ever an example of a “blue water” moment, this is it. None of us have ever been to this financial rodeo, and even seasoned curmudgeons like me are having to reevaluate our definition of “safe.”
So that leads to the burning question that baby boomers and potential annuity buyers are currently asking, “Are annuities safe right now?”
That’s a very good question with no perfect answers, so let me share my three decades of experience on why I feel the annuity sector will once again come out OK when the financial dust eventually settles.
Claims Paying Ability
All annuity contracts are issued by life insurance companies. Most annuity types are classified as fixed annuities, and those are regulated at the state level. Variable Annuities (VAs) are the tax deferred outlier, and are classified as a security and overseen by FINRA, the SEC, etc.
When you buy an annuity, you are transferring the risk to that life insurance company to primarily solve for lifetime income stream or principal protection. Yes, there are other reasons people buy annuities, but these are the primary contractual goals. Annuities were originally introduced to provide a pension type income that you can never outlive, and that’s a monopoly that only annuities can provide. The annuity payments are primarily based on your life expectancy at the time you start the income, with interest rates playing a secondary role.
Transferring risk means that the annuity company (i.e. issuing life insurance company) is on the hook to contractually back up the claims. So you have to make sure that their claims paying ability and financial strength is sufficient to support the guarantees you are buying. There are 4 primary ratings services that cover the annuity sector. Those companies are Standard & Poors, AM Best, Moody’s, and Fitch. I recommend using the COMDEX ranking system as well, which is a compilation of all 4 ratings services with an easy to understand 1 to 100 score.
With that being said, we all remember Lehman Brothers and Bear Stearns being highly rated just a few days before they closed their doors. Like you, I never thought I would see that happen.
However, step one of your annuity due diligence is to look at the carriers balance sheet, ratings, and COMDEX score. Nothing is foolproof, but this is a good start.
Handcuffs & State Guaranty Funds
I always tell people that annuity companies aren’t smarter than banks, they are just more regulated and have more financial “handcuffs.” Fixed annuity types have strict rules on how much of the initial premium has to be available day one. In addition, annuity companies are not allowed to place your money into "risky" investments. The state regulations on that are stringent, to say the least.
Fixed annuities are also backed up by State Guaranty Funds. Each state has different rules, but the backing is per policy-per owner-per carrier...up to a certain dollar amount. Agents can’t use the State Guaranty Fund coverage as part of the sales pitch, which is a key point you need to know. The industry wants you to primarily focus on the claims paying ability of carrier. State Guaranty Funds are a nice warm blanket just to know it’s there, but it should never be compared to FDIC coverage. That’s an apples to oranges comparison in my opinion.
The Annuity Confidence Mafia
When I refer to “The Annuity Mafia,” I’m not talking about any Godfather movie type references. That would be a good narrative, but the annuity company CEOs that I know don’t fit the “tough guy” bill. What I am referring to is the self-regulating and self-policing that goes on behind the scenes within the annuity industry. Let me explain further.
Annuities are what I call “confidence products.” For example, you are transferring the risk to an annuity company to pay you for the rest of your life regardless of how long that might be. You have the confidence in that carrier to pay. If for some reason those payments stopped coming in, the public would lose confidence in the annuity industry.
I always tell people that if my 81 year old mother in Florida missed one of her Single Premium Immediate Annuity (SPIA) payments because the carrier couldn’t pay...it would be over for the annuity industry. She would be on every cable news show and in every newspaper complaining to anyone that would listen. Believe me that the big annuity companies know this, and also know how fragile this consumer confidence actually is. My prediction is that they will never let this loss of confidence happen.
In my opinion, this industry oversight is the best answer to “Are annuities safe right now?” The Annuity Confidence Mafia is going to make sure that contractual golden goose is alive and well…..along with your annuity contractual guarantees.