Annuity Safety
What Type of Annuity Is Safe for You?
Retirees who want to supplement their Social Security and pension income can look to their savings. They can invest those savings to generate an income or they can annuitize all or part of them. The annuity – as an insurance product – can offer a lifetime income. But are annuities safe? Well, that all depends on what you need to be safe from?
Because annuities are insurance products, insurance companies can guarantee a lifetime income. Their vast number of annuity contracts allows mortality statistics to govern predictable payout obligations as a whole. So, these insurance companies need only keep their funding, investments, and finances in good order for the duration of their payout obligation to you for your safety.
AM Best and others monitor each company’s ‘financial health’. But companies can potentially fail their obligations – although this possibility is generally low. If you start with annuities that have a safety rating of A+ form AM best and AA from S&P, your annuity safety will be high.
Retirees either want to begin annuitization (getting monthly payouts) right away or delaying it until there much older. The latter option is a form of insurance against running out of income due to living too long. These days, retirees have a 50% chance of living longer than 20 years once they turn 65. So, the projected duration of any annuity contract is a significant amount of time – if you’re healthy. Note also that lifetime annuities generally leave nothing for beneficiaries.
Annuities come in two essential flavors: fixed annuities and variable annuities. For fixed annuities, the insurance company pays you a constant income for life. The contracts rely on long term interest obligations from high grade bond investments to assure your constant income.
The benefit of a fixed annuity is your assured of this lifetime constant income. But living 20 years will allow even minor inflation rates to significantly erode the value of that income.
Payouts from variable annuities – and these include indexed annuities – are vulnerable to market variations. These also can give you a lifetime income – but one that continually varies. That’s because their funded by stocks and mutual funds and other similar investments whose values fluctuate. Such investments may compensate for inflation.
Although a rising economy can increase your payout, a downturn can significantly erode the amount of payout you get. So, variable annuities leave you vulnerable to market variations – which will occur.
It appears that choosing a fixed annuity offers more safety for the retiree who needs to rely on savings’ income. He may have to risk the threat of inflation.
Those that can afford more investment risk, might consider a variable annuity. But for the possibility of a retirement cut short, a better approach may be to split his savings - put part into a fixed annuity and judiciously invest the rest for growth.
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Issues on Annuity Safety for Retirees |
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Type of Annuity: |
Fixed annuity |
Variable annuity |
Index annuity |
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Threat |
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Inflation: |
vulnerable |
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Market downturn: |
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vulnerable |
vulnerable |
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Insurance Co. fails: |
vulnerable |
vulnerable |
vulnerable |
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Your Circumstance |
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Can’t afford to lose income: |
More safe |
Less safe |
Less safe |
Note that annuities once annuitized cannot be surrendered for value. Income from deferred annuities is taxed as ordinary income and withdrawals prior to age 59 ½ are subject to a 10% penalty. Income from annuitization is taxed part as ordinary income and part as return of capital. Any guarantees are based on the claims paying ability of the insurance company. Annuities should be considered long term investments. Annuities are insurance products and subject to insurance related fees and expenses.
If you are considering an investment in any type of variable annuity please carefully consider investment objectives, risks, charges, and expenses of the Variable Annuity and its underlying sub-accounts before investing. For this and other information about any Variable Annuity investment, always obtain a prospectus and read it carefully before you invest.
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Tags: annuity safety
March 6th, 2009 at 8:17 am
Incorrect.
The Index Annuity — or Fixed Equity Index Annuity (EIA) — is not vulnerable to market downturns. That is, your principal is not vulnerable. Your interest credit for any given year may be zero, but your principal value will never go down (excepting withdrawals).
The very best thing about EIAs is that they can only increase in value, unlike variable annuities. Each year, the interest credit is added to your principal, and that is your new base. This is called annual reset, and it is a feature unique to EIAs.
It is patently unfair to lump EIAs in with variable annuities (which are a securities product and widely panned as one of the worst investments ever created).
May 7th, 2009 at 2:04 pm
Both fixed and indexed annuity accounts are superb vehicles given their respective track records over the past decade. You certainly don’t have to worry about losing your principal and interest.
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June 21st, 2009 at 11:30 am
The best thing about annuities is the secured capital, you are guaranteed to receive back your principle investment as well as any profit.
June 25th, 2009 at 12:13 pm
I’ve heard that aa companies are backed 100% or better by aa insurance companies, and no insurance companies failed to pay even during the great depression. How can I get written verification of the safety of annuities?
June 28th, 2009 at 3:14 pm
I think that retirees should spend their insurance and exploit them as best you can, because the government tends to steal every penny.
June 29th, 2009 at 2:27 am
If only the fixed anuities weren’t vulnerable to inflation. That’d be the day
July 2nd, 2009 at 8:39 am
Sadly, my parents did not have Mediciad qualified annuity. And when my father had to go into long-term care, it broke the bank.
My advice to all people is to plan, plan, and plan some mroe for the future.
I’ll definitely be investing in a deferred annuity soon.
Thanks!
July 13th, 2009 at 10:53 pm
Now i am planning to investing in deferred annuity.
July 14th, 2009 at 2:21 pm
I think deferred annuity is the way to go, because it is the safest way..
July 16th, 2009 at 10:10 am
Ok…safety issues aside (which, in this economy still makes me extremely nervous), does anyone know what kind of average return these annuities are providing? What is the return comparable to? Stocks? CDs? Treasuries? I know that the return varies with the variable annuity, but what are the average returns today? How about fixed?
July 17th, 2009 at 4:40 pm
Wayne, I wish fixed annuities weren’t vulnerable to inflation. That would be Great.
July 22nd, 2009 at 1:02 am
Before reading this post, I have so many choices for my parent. Now, I would go for the deferred annuity. It seems to be the best choice to me and my dad.
July 23rd, 2009 at 4:35 am
Yes, it would be prudent to apportion our savings equally in fixed and variable annuities. But considering the spiraling prices in inflationary periods i would be tempted to go for 75-25 in favor of variable annuities.
July 28th, 2009 at 11:32 am
What are the returns that the annuities are yielding? Any idea on what the fixed annuities provide would be helpful.
July 29th, 2009 at 10:53 am
It’s possible to purchase inflation protected annuities, it would be great if you could provide some information about that.
July 30th, 2009 at 6:55 am
Yes, i will investing in deferred annuity.
Thank You
August 7th, 2009 at 10:08 am
I think government is a big bull**** because they tends to steal anything from us.
Investing into a deferred annuity i think is a good thing.
August 15th, 2009 at 6:39 am
I think this is a good explanation of annuities. But some other aspects could be discussed such as that when they are set up properly and follow certain rules one can still retain the annuity and yet still qualify for Medicaid.
October 24th, 2009 at 11:36 am
Before reading this post, I have so many choices for my parent. At the moment I would go for the deferred annuity. It is safest way. Thanks . Good article.
November 4th, 2009 at 9:03 am
I have an Roth IRA inside my annuity - was this a good move as I can get tax free withdrawls?
November 4th, 2009 at 11:24 am
Now i am planning to investing in deferred annuity.
November 5th, 2009 at 9:36 am
The best thing about annuities is the secured capital, you are guaranteed to receive back your principle investment as well as any profit.
November 11th, 2009 at 8:14 pm
Safety of investment is always have 2 side… how about deferred annuity ?
November 24th, 2009 at 3:39 am
i agree the fact that annuities give you both your initial outlay investment and your profits on top of that back, this is great. deferred annuity is the best option 100%
November 30th, 2009 at 1:11 pm
of course secured capital is key, know and learn all that you can about annuities so you dont get ripped off………
January 5th, 2010 at 8:58 am
Thanks. Great post for me. I learnt somethins about annuity safety. Very educational post. Have a nice day.!
January 15th, 2010 at 11:50 pm
Thanks for your post. A Fixed Annuity is the safest type of Annuity.
January 16th, 2010 at 9:49 pm
So are annuities a good investment or are they bad investment?
January 17th, 2010 at 10:53 am
AM does a good job weeding out the annuity firms in the business. I’m looking at purchasing annuities in the next 6 months as well.
January 21st, 2010 at 12:26 pm
I would always choose fixed annuity because it’s much more safer then variable. At least I think so..
February 2nd, 2010 at 12:14 am
I come from a country where very people place any importance in insurance and worst still annuity. I believe a post like this would help me in my sensitisation campaign.
February 2nd, 2010 at 12:18 am
At this time,I think I should be more consider with my parents,because I would like they would be more safe with the annuity safety.
February 2nd, 2010 at 2:15 am
A Fixed Annuity is preferred.
Since i more care the safety of Annuity.
And in some countries, the government tends to use the money, so we need to take care.
February 4th, 2010 at 11:28 pm
If you are in a country with a good local government,no matter the fixed one,or the varible one,you can always get what you want,but if you aren’t lucky,you’d better choose the fixed one to guarantee the safety of your annuity
February 5th, 2010 at 2:12 pm
Fixed annuities are way safer than variable annuities. You know what you can count on for a monthly payment. In this economy with interest rates and mortgages all over the place; you need something you can count on. I would only consider fixed annuities.
February 7th, 2010 at 1:05 pm
Annuities are secured capital, you are guaranteed to receive back your principle investment as well it should be part of any portfolio,.
February 14th, 2010 at 1:59 am
I think this is a good explanation of annuities. Now i am planning to investing in deferred annuity.
thnks