Consumers can liberally vet providers before making long-term commitments.
Often questioned, misunderstood and maligned, annuities and their providers are open to evaluation at nearly every purchase touchpoint. This works well for investors, who have multiple review sources at their disposal, including providers’ track records of longevity, liquidity and reliability.
Hardly anything in life is as prevalent as the desire for safety. It begins with childhood (“Look both ways before crossing the street”), and continues through retirement, when the financial focus is on distribution, not accumulation, and where volatile markets provide few chances, if any, to course-correct.
Annuities are growing in popularity as a retirement plan component. Their safety should be considered prior to purchase, but unlike the above example from childhood, our mothers and teachers won’t be present as guides. Fortunately, several resources are available to help evaluate an annuity’s safety and suitability in a retirement portfolio.
It’s important to remember that an annuity is a contract for a stream of payments to be made by a provider at future intervals. With some resemblance to the role of the Federal Deposit Insurance Corporation (FDIC) at banks, states’ insurance departments offer limited guarantee of payment in the event that a provider fails to pay out a fixed annuity or life insurance contract. In contrast, variable annuities do not carry guarantees. The comparison to the FDIC is not apples to apples, and the burden lies with the buyer to check with the appropriate state in advance for guaranteed protections.
An early safeguard in the annuity safety review process is the financial adviser. He should have excellent knowledge of annuity providers – typically insurance companies – and their financial statements, including the balance sheet, which will reflect liquidity and an ability to pay today’s obligations. While not guaranteed for the future, a provider’s longevity, financial condition, and any non-payment history, if any, are strong indicators of character. Additionally, advisers can access near-daily reporting that can indicate troubled providers to be avoided.
Consumers can take comfort in the history and sources of annuities when considering safety. Available in the United States for more than 50 years, annuities are generally offered by insurance companies, which are traditionally conservative in investments and operations. Their own portfolios are laden with government-backed securities, and as risk management professionals, typically do not take on undue risk that could negatively impact their ability to meet commitments. Additionally, their annuity offerings are the result of actuarial scrutiny based on math, science and the “laws of large numbers,” with their voluminous data for benchmarking.
Independent ratings services are knowledge sources that are external to the adviser and provider communities. These companies monitor the financial industry and pass judgment on products, services and providers. Care must be taken in that a specific rating, AAA for example, may not mean the same for all products or services. A few of the more common ratings services are AM Best (www.ambest.com), Fitch Ratings (www.fitchibca.com) and Standard and Poor’s (www.standardandpoors.com).
The growth of annuity sales is an indicator of their popularity, especially in retirement portfolios. Given the long-term payment promise they carry – often decades in an era of increased longevity – the decision to buy can be considered with research from multiple resources. Strong payment histories and the legacies of insurance company providers can be sources of confidence and safety to investors as they contemplate the fit of an annuity within their overall retirement plan.
Syndicated financial columnist Steve Savant interviews retirement income certified professional and investment adviser representative Tripp LeFevre on Who’s Telling the Truth About Annuities. Right on the Money is a weekly financial talk show for consumers, distributed as video press releases to 280 media outlets and social media networks nationwide.
