Annuities have long been considered the safe investment alternative especially for people who are most concerned about securing their retirement income. Life insurance companies have been issuing annuities since the 19th century. Since then, even during times of the most difficult economic conditions such as the Great Depression, no annuity owner or beneficiary has ever lost a cent of their investment. Life insurance companies have always been considered to be the most rock solid of all our financial institutions, and, while there have been a few instances of insurers wavering on insolvency, the life insurance industry has always taken care of its own by propping up or buying up troubled companies.
But times are different you might say. After all, it took the federal government to bail out one of the largest insurers in the world (AIG) which has billions of annuity deposits. And, when financial giants like Lehman Brothers can fail, we must be living in the worst of economic times. With life insurance stock prices tanking in recent market declines, isn’t it just a matter of time before a life insurance company failed? It’s not very likely which is why annuities are still considered among the safest investments you can find.
While there is every reason to be cautious in these tumultuous economic times, when all factors are considered, and every aspect of the underlying safety of annuities are fully explored, the fact remains that annuities provide the greatest degree of safety of any investment.
The Layers of Annuity Fortification
State Guaranty Associations
Annuity critics often point to the fact they don’t have the same protection as do bank CDs because their deposits aren’t federally insured. The fact is that annuities deposits are afforded government insurance in the form of state guarantee associations. Each state has its own insurance department for purposes of regulating the companies that operate within its borders. Additionally, all states have established a state guarantee association which funded by the life insurance companies. Should an insurer become insolvent, the state guarantee funds are made available to cover its claims up to $100,000 (the amount may differ in your state).
Legal Reserve Life Insurance Companies
The legal reserve system was established to ensure that life insurance companies set aside enough reserves to handle all of their future claims. Unlike banks which may only be required to hold 10% of its assets in reserves, life insurers, depending on their financial condition are required to hold as much as 90% of their assets in reserves. Some states have required as much as 100%. Life insurers are constrained from investing these reserve assets in anything government securities and high grade bonds. Only those companies that fully comply with the legal reserve requirements of their state are given the state of a “legal reserve life insurance company”.
When a life insurer assumes too much risk, such as when they underwrite a high risk life insurance case, they “sell” the risk to another life insurer. This prevents any over exposure of risk in any one company which could put a strain on its reserves. Some insurers specialize in reinsurance and are always available to absorb a high risk case. In some states, there are requirements that any life insurer must act as a reinsurer in order to ensure that there is a market for high risk cases.
Another requirement that life insurers must adhere to within their state is surplus which is amount of assets that exceed liabilities. Each state has its own surplus requirements and they can apply different ratios that are based on the financial condition of the company. Many life insurers set higher surplus requirements for themselves as a way to demonstrate their financial strength.
All life insurance companies are subject to an annual audit by their state insurance examiner. All aspect of the insurers financial condition are thoroughly reviewed and if there has been any adverse change from one year to the next, the state may adjust the insurers legal reserve and surplus requirements.
These layers of fortification have been the reason why no annuity contract owner or beneficiary has ever lost a penny since annuities have been sold by life insurance companies in the United States. As much comfort as one could take from this, it is still important to carefully investigate the financial strength and integrity of a life insurer before depositing any money with it.
All of these fortifying factors along with the complete analysis of a life insurers financial prospects are measured and weighed by independent ratings agencies such as A.M. Best, Standard & Poor’s, Moody’s. Companies that have been assigned at least an ‘A’ rating are considered financially secure.