Annuities Are Sleep Insurance
When you ask annuity owners why they purchased their annuity, the answer often involves one of the many benefits that they offer: Tax deferral, safety, access to funds, guaranteed principal, and lifetime income stream. But if you then ask them what having those benefits really means to them, many of them will, after a deep pause, answer, “It allows me to sleep at night knowing that my money will be there when I need it the most.” Annuities are different things to different people, but for most annuity owners annuities are sleep insurance.
If you ask most people today what keeps them awake at night, among the answers you are likely to get is some variation of “having enough money to retire on”. The baby boomers, especially, are facing a serious predicament as their retirement funds have been depleted through market declines. Coupled with the likelihood that they will live as much as a quarter of their lives in retirement, their greatest fear is the possibility of outliving their income sources. Even lifelong savers are tossing in their sleep wondering if their savings will last longer they do.
There is only one type of investment vehicle that can be purchased by an individual that can provide the reassurance that many people need at retirement. At their core, annuities are a secure source of income that is payable for the lifetime of the annuitant. The income is stable, predictable and it is guaranteed by the life insurance companies that issue them.
There may be some annuity owners who still sleep with one eye open to keep watch on the life insurance company that issued their annuity. With all of the bank failures that have occurred in the last several years, depositors are anxious but somewhat reassured that their money is safe due to FDIC insurance. It is true that annuity deposits aren’t federally insured like bank deposits. Rather, they are backed by the financial strength of the issuing life insurance company and secured by many safeguards that have been put in place by state regulators.
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Life insurers are regulated by the states in which they are domiciled. Each state establishes very strict requirements for life insurers in setting aside sufficient reserve assets that are available to meet future obligations. A substantial portion of each premium dollar the life insurer takes in must be set aside in order to cover future claims. This, along with frequent examination of life insurers’ books by the states ensures that the future obligations of policyholders will be met.
Additionally, many life insurers have a stated policy that they must operate at a surplus which means that their assets should always exceed their liabilities. The not only ensures that they can remain solvent in the worst of economic conditions, it also means that they will always have sufficient reserves to meet future obligations.
There is also something called reinsurance which many life insurers participate in when they foresee that potential claims could put their reserve at risk. This is often done when an insurer underwrites a large claim or has accumulated a basket of high risk claims. The reinsured amount protects the assets of the insurer should the claims result in bad experience.
Life insurers that are rated highest by the independent rating agencies, such as A.M. Best, Moody’s, and Standard and Poor’s, are considered to be superior in their ability to meet their obligations. And, in the midst of the dozens of recent bank failures, not a single life insurance company has failed. In fact, of the few life insurance failures of the last several decades, no annuity contract holder has lost a dime. This is because when a life insurance company gets into financial difficulty, the other, larger life insurers line up to buy the assets and obligations of the troubled company. As long as one sticks with AAA rated life insurance companies, they should be able to sleep soundly.
Annuity owners who get nervous over the financial condition of a life insurer do have an out. They can simply transfer their annuity assets to another life insurer through a 1035 Exchange allowed by the tax code. Such a transfer could trigger a surrender fee if it is made prior to the end of the current contract’s surrender period, however, for peace-of-mind, that may be a small price to pay. The good news is that there are no tax consequences when a direct transfer is made from one annuity to another.
The track record of the life insurance industry should ease any concern an annuity owner might have. The combination of the legal reserve system, strict state regulations, industry safeguards, and the overall financial stability of the industry has protected policyholders for decades and makes it very unlikely that one will suffer any kind of loss in the future.
Every night when an annuitant goes to sleep, he or she can be secure in the knowledge that no matter what happens; they will get a monthly check from their annuity. In fact, it was the greatest baseball that ever lived that said, “I may take risks in life, but I will never risk my money, I use annuities and I never have to worry about my money.” Sleep tight.
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