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Economic uncertainty is everywhere except one place: annuities. Advisors still don't trust them. But rejecting them as unsafe is a misguided disservice to clients who would benefit from the financial solutions they provide.
The insurance companies that issue annuities can default, of course, but annuitants' money won't disappear. Most headline-grabbing insurance failures involve long-term care or property and casualty companies, which operate on a different business model. By definition, those companies are impaired by unexpected calamities, while annuity providers are immune to floods, fires and illnesses.
In the aftermath of the financial crisis, between 2008 and 2015, not one provider with outstanding annuity obligations defaulted, according to the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA). Even the AIG debacle of 2008 involved only the parent company, not the annuities operations (which AIG recently announced it's spinning off into a separate company).
Should tragedy strike, a rigorous safety net will provide swift corrective action. In the summer of 2002, for example, London Pacific Life & Annuity Co., a Raleigh, N.C.-based subsidiary of a U.K. insurance group, defaulted on nearly $2 billion in annuity obligations, impacting customers in some 40 states. State regulators moved into its headquarters, liquidated its assets, and ultimately found a buyer, Hartford Life Insurance. All annuity holders were made whole.
To be sure, annuities aren't as secure as FDIC-backed bank accounts or Treasury notes. But their returns are a lot better, and they offer something no other instrument can: guarantied lifetime income.
In fact, corporations such as Lockheed Martin, FedEx, Raytheon, and Alcoa transferred some of their employee pensions to annuities. "The state regulatory system that oversees annuities and the life insurers that issue them imposes a higher level of regulatory and solvency scrutiny than the federal regulations governing pension plans," explained Pensions & Investments magazine in February 2019.
That scrutiny includes requiring a capital cushion that most issuers exceed. In 2018, the most recent figure available, more that 94% of annuity providers had at least twice the minimum required, according to the American Council of Life Insurers' Fact Book.
Regulations also limit where carriers' assets can be invested; they must follow the strict guidelines of the National Association of Insurance Commissioners (NAIC). "They are more regulated and 'handcuffed' [than banks] as to where they can legally invest the customer’s money," says Stan Haithcock, the Ponte Vedra Beach, Fla.-based expert known as "Stan The Annuity Man."
Granted, annuities aren't right for everyone. They can be complex and expensive. Many tie up your money with steep "surrender" charges for cashing out early. But a growing number feature no loads or hidden costs or surrender periods. Dismissing them as too risky is shortsighted and a poor excuse for excluding a vital tool.
"Investors can also lose money on equities, mutual funds, bonds or other types of financial products," says Colin Devine, a financial advisor in New York City and a fellow of the Alliance for Lifetime Income.
Moreover, annuity risks – such as they are – can be mitigated by researching the carrier's credit rating with A.M. Best, Standard & Poor’s, and Moody’s. "Choose an insurance company that is financially strong and stable, prudently managed, and highly rated," advises Eric Henderson, president of Nationwide Financial's annuities business, in Columbus, Ohio. (London Pacific was not A rated.)
History is a good guide. "If the company has been through the Depression or World War II and has a solid rating, it’s likely to stick around," says Luis Strohmeier, a wealth advisor at Octavia Wealth Advisors in Los Angeles.
Beyond that, every state plus D.C. and Puerto Rico has its own insurance guaranty association. All cover at least $250,000 in annuity benefits. (In New York, New Jersey, and Connecticut, the minimum is $500,000.) Those are base protections, not caps. Before buying, check the limits of your state's guaranties. You can increase protection by spreading funds over several annuities.
"Claims have generally resulted in significant recoveries over and above [those] levels," says Peter Gallanis, president of NOLHGA, the Herndon, Va.-based association of state guarantors.
Nobody wants to recommend an annuity that stumbles. But before advisors compile a retirement strategy, they need all the facts. They should be confident about the safeguards protecting what could be a retiree's most valuable holding.
Ben Mattlin is a Los Angeles-based freelance writer, and David Lau is CEO of DPL Financial Partners in Louisville, Ky.
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