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.
More: compare annuities.
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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.
Annuity Guys last blog post..Easy Health Insurance Quotes
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.
August 20th, 2009 at 5:04 pm
I’m just curious…what are the returns that the annuities are yielding? Any idea on what the fixed annuities provide would be great, thanks.
August 29th, 2009 at 2:27 pm
A fixed annuity is a contract offered by an insurance company that is much like a bank CD. You deposit a certain amount of money and the insurer agrees to pay a certain interest rate over a specified period of time
A variable annuity, by contrast, works more like a mutual fund. You invest in one or more “subaccounts,” which can own stocks or bonds or a combination of stocks and bonds.
auto club
September 9th, 2009 at 1:35 pm
How do the surrender charges for early closure of an annuity compare with an early withdrawal penalty of the CD?
Besides AIG. how are other insures faring?
October 3rd, 2009 at 11:08 am
Great information on Annuities. I have always had a problem figuring out what is actually best for my needs. I didn’t want to ever go talk to someone about it because I just didn’t feel comfortable. But you have helped me thankfully.
October 4th, 2009 at 6:11 pm
I didn’t know very much about deferred annuity but it seems like it might be the way to go for me as well.
October 6th, 2009 at 7:14 am
I always get very confused when it comes to working out annuities. I get the whole difference between variable and fixed annuities, but I can never figure out what is the best option. My brain wont grasp the concept for some reason. Add the whole “deferred” thing, and i really get confused. Hopefully I can find a “Annuities for Dummies” book somewhere.
Johnny Blaze
October 8th, 2009 at 1:42 am
Hi,
I guess for me deferred annuity is quit workable.
Nice post
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.
October 31st, 2009 at 6:08 pm
Thank you for your explanations. I will go for the deferred annuity !
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………
December 17th, 2009 at 6:47 am
I think deferred annuity is the way to go, because it is the least risky.
December 18th, 2009 at 5:53 am
I think deferred annuity is the way to go, because it is the safest way..
December 20th, 2009 at 6:24 am
Capital security in one of the most important point of annuities, the principal invested amount is always safe with add-on growth
December 24th, 2009 at 12:28 pm
Annuities are a great PART of a retirement plan. Like all investments, diversification can help insure a steady income stream.
December 29th, 2009 at 5:37 pm
So I guess your health determines your whether or not the annuities are safe? Annuities are worth it if the profit from the principal comes through.
December 29th, 2009 at 10:26 pm
Good information. I work with many seniors who are taking out a reverse mortgage. Some not so moral mortgage brokers have given the reverse mortgage a bad name because they put seniors into long term annuities with stiff withdrawal penalties.
Roy Paeth
Chicago First Time Home Buyer
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 3rd, 2010 at 12:53 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.
February 3rd, 2010 at 11:03 am
it would be prudent to apportion our savings equally in fixed and variable annuities and hat is the return comparable to? Stocks? CDs? Treasuries?
February 3rd, 2010 at 12:05 pm
Awesome stuff! I want to get into annuities and this helps a ton.
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
February 20th, 2010 at 5:09 am
Several agencies use a rating system is to provide an opinion as to an insurer’s financial strength and ability to meet ongoing obligations to policyholders. Ratings are typically derived from an evaluation of a company’s balance sheet strength, operating performance, and business profile, among other factors. Some of the most respected ratings agencies are A.M. Best, Moody’s, Standard & Poor’s , and Fitch.
February 25th, 2010 at 6:44 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 26th, 2010 at 3:17 am
oh.. it Investing into a deferred annuity i think is more a good thing.
March 5th, 2010 at 1:18 am
Annuity safety is just like our life safety,we should care more about it.
So this is an useful post.
March 8th, 2010 at 6:21 am
Before choosing variable annuities I would have advised you to first check this article on related problems: http://news.morningstar.com/classroom2/course.asp?docId=4514&page=3&CN=
March 8th, 2010 at 6:51 pm
Thank you for the inforamtion. I know quite a bit about annuities already but I really like how you compared them so its easier to decide which one is better for me.
March 20th, 2010 at 2:58 am
ncome 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.
Australian Detox
March 20th, 2010 at 1:50 pm
Thank you for this explination. It has been very difficult to understand these in and outs, and i have been trying to pull my annuities money out for over a year. thank you again.
March 23rd, 2010 at 9:31 am
Although a fixed annuity would be safer, I believe a variable annuity would be the best buy when the economy is in a slump as it is now. As I recall the stock market on average has increased 10% over time.
March 26th, 2010 at 9:47 am
“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.”
where this number came from ?
March 28th, 2010 at 5:48 am
Annuities is a tough subject as it is. The choice you make could actually make or break you. The explanation above has enriched my knowledge a lot.
March 31st, 2010 at 5:17 am
Here at excellent review of safe way to investment. i will investing in deferred annuity.
Thank You
April 2nd, 2010 at 2:27 pm
I just added a annuity just over a years ago to my portfolio. It’s for ten years guaranteed 3.5% and caps at 8%. It’s off the S&P 500, so far so safe.
April 5th, 2010 at 7:12 pm
We just added a annuity to our portfolio just over a years ago. It’s for ten years guaranteed 3.5% and caps at 8%. It’s index S&P 500, so far so safe.
April 17th, 2010 at 8:06 pm
Most people are going to choose the deferred annuity in these economic times. It is safest way. The older you are the more I would lean toward the deferred, but the younger person may look the other way.
April 20th, 2010 at 5:58 pm
Isn’t an annuity’s safety somewhat dependent on the insurance company backing it?
April 23rd, 2010 at 3:10 am
Do any insurance companies publish proof of annuity reserves?
May 5th, 2010 at 11:31 pm
Hello…
I feel that the deferred annuity is the best buy in these times. Thanks for the information about annuities you provided.
May 9th, 2010 at 8:04 pm
Informative post, I was looking out for such info. thanks for posting such information about annuities. Look forward for more updates…
May 13th, 2010 at 2:41 am
Annuities were considered the greatest safe investment until insurers started unsteady and trembling.They are great investment for all types of investors so to speak. However, it is best to select a right annuity for you and this means doing some intense research is a big must.
May 19th, 2010 at 6:59 am
yes, there are many people who are confused with what type of annuity that are safe for them. your tabular column is very useful in selecting the suitable one.
May 21st, 2010 at 6:05 am
thanks for the information.hope it help us know whats the different of annuity and investment
May 22nd, 2010 at 2:16 am
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Insurance comapnies assure annuities as its a safe way to investment.This blog is informative.
May 24th, 2010 at 10:12 pm
This is a great simple explanation of what an annuity actually is. Sounds like fixed annuities are the safest. It sucks that they’re vulnerable to inflation though!
May 26th, 2010 at 7:06 am
Deferred annuity suits me best as it ensures steady income generation after retirement,but what if I meet early death after retirement?Does it get passed on to my natural heirs?
June 1st, 2010 at 10:36 pm
I am prefer to choose fixed annuity. In my opinion, One special type of fixed annuity is the living benefit annuity, also known as a GRIB (Guaranteed Retirement Income Benefit). The best living benefit annuities guarantee at least a 5% return over seven years, or the highest attained value on each anniversary during the surrender period, whichever is greater. In exchange for this living guarantee, the living benefit annuity has a surrender charge, or penalty for early withdrawal, no up-front bonus, and a slightly higher annual fee.
June 9th, 2010 at 12:09 am
Great post, I think fixed annuity is the safest type of Annuity.
June 9th, 2010 at 5:48 am
yes we have to plan plan plan and plan about the future. and annuity become the alternative way after the retirement
June 17th, 2010 at 12:22 am
My vote to the Goverment. Because at the periods of recession we feared a lots about fixed annuity in private sector. So I will trust in this case to goverment
June 17th, 2010 at 12:28 pm
our family have been investing in deferred annuity almost 5 years…we think, fixed annuity is the best choiec of anuity.
June 22nd, 2010 at 9:52 pm
Nice site! Very professional and full of information. Pretty good post. A Fixed annuity is the best and safest type of annuity.
June 26th, 2010 at 8:11 am
You also need to factor inflation into the risk. Over the course of annuity, even if you are paid as agreed, the payments could be worth much less in real dollars in 5 to 10 years.
June 28th, 2010 at 3:32 am
There are many types of annuities. Each one will provide different types of benefits, as long as the annuities are not dependent on the markets it will be safe investment.
June 29th, 2010 at 12:27 pm
I think it is important for people to have all annuity options laid out in front of them like this. So much of the confusion arises when people are only presented with one option and do not know the in’s and out’s of it.
Might I suggest Dan Solin’s article, which presents a compelling argument for investing in annuities: http://bit.ly/a88Wfw
July 1st, 2010 at 5:36 am
Deferred annuity suits me best as it ensures steady income generation after retirement,but what if I meet early death after retirement
July 5th, 2010 at 8:42 am
I think this is a good explanation of annuities. Now i am planning to investing in deferred annuity.
thnks
July 6th, 2010 at 3:54 am
In my opinion fixed annuities are much less of a risk than variable annuities. I would rather take the risk of inflation eroding my annuity than it being eroded by economic situations, especially with the US economy the way it currently is and national problems springing up left and right
July 8th, 2010 at 1:39 pm
For a secure investment annuities are hard to beat because of the secured capital, guaranteeing you that you’ll receive your principle investment as well as any profits back.
July 9th, 2010 at 9:01 am
Inflation has to be included in this. Fixed annuity is the best and safest type of annuity
July 9th, 2010 at 5:40 pm
It is a very simple explanation of what an annuity. Sounds like fixed rate is the safest. It sucks that they are vulnerable to inflation, though!
July 9th, 2010 at 6:42 pm
Everything seems to be good if this post is accepted, but I really don’t trust the “Insurance Guys”..they say something at the time of insurance and later on show their tos which means something else…
July 15th, 2010 at 10:17 pm
Annuities have saved people more money than they will ever realize over the past 2 years…..they should be a part of every portfolio!
July 17th, 2010 at 4:30 pm
The only thing that stuck out for me is that the pay out options often include life with right of survivorship. Many annuities do include the continued but usually reduced payout of benefits to the surviving spouse. When planning for this event, agents will often maximize the payout while funding a life insurance vehicle to cover the lost income to the spouse. Good strategy.
July 19th, 2010 at 3:59 pm
Years ago a friend of mine was involved in selling variable annuities for Paine Webber. He told me the funny thing was that after several years later the ONLY clients that really did well were the ones that invested a substantial sum into variable annuites that had protections on the downside built in.
Good Article
Joel
July 26th, 2010 at 12:30 am
The money that you use to buy your annuity will be invested, usually in government stocks, which are considered a very safe investment. However, the returns on the annuity income are based on The Bank of England’s base interest rate, and compared to 10 years ago this is not providing a very good return. In fact, annuity rates are now almost 50% lower than they were 10 years ago.
Word Market
July 28th, 2010 at 7:11 am
hi i think annuitizing a part is better than annuitizing all….good post
July 29th, 2010 at 6:02 am
I agree that it is better to invest in an annuity safety. I have learned that it is more beneficial than to other investments. I would suggest this to all my friends and relatives.
July 31st, 2010 at 8:44 pm
not everyone could bought annuity , it needs a staable capital supply.
August 7th, 2010 at 1:07 pm
This is a great investment. Both fixed and variable annuities will ensure that your capital will be safe.I would have to go further research about annuity. This is a good preparation for retirement. Thanks for the information and those who give further analysis about annuities.
August 8th, 2010 at 5:34 am
Honestly never heard of “annuity” until I read this post. I think fixed annuity will provide a person with a more stable flow of income compared to variable annuity. Either way, both types of annuity will help a person earn money even while he’s sitting at home the whole day, so having an annuity doesn’t hurt one bit.
August 9th, 2010 at 1:53 am
I think this is a good explanation of annuities.Yes ,I agree that it is better to invest in an annuity safety.
August 12th, 2010 at 5:37 am
Index annuities offer an absolute guarantee of principal. Fixed annuities and immediate annuities also offer an absolute guarantee of principal. Additionally, your deferred interest compounds tax-deferred until you actually need to have retirement income. Fixed annuity interest rates can commonly exceed bank certificate of deposit rates. Index annuities can have credited interest rates can rise as the underlying stock market indices rise.
August 13th, 2010 at 9:37 am
Great post! Very informative. Fixed annuities look like a safer option.
August 14th, 2010 at 8:55 am
Thanks for the explanation of annuities. i am suddenly 49 and have to start planning for the future with a little less risk then my failed investments of the past!!
August 16th, 2010 at 5:45 am
Annuities don’t keep up with inflation, therefore what’s the point in having them? I’d rather invest my money in something that gives me a compounding rate of return.
August 18th, 2010 at 3:31 pm
Thanks for explaining annuities . They are an important but under utilized form of retirement investment.
August 19th, 2010 at 8:26 am
Thanks for your information about annuities. It’s very informative.