Annuities are unique investments popular for income, tax-deferral, growth and safety. Most policies have no exposure to market downturns.
They are designed to provide certainty. Conservative investors enjoy having a portion of their portfolio safe and protected from losses.
While these accounts do come with guarantees, many want to know how they’re insured and by whom.
The Three Most Common Annuity Types
Annuities are insurance products that can only be purchased from licensed and regulated insurance companies. They can be fixed, indexed or variable. A fixed annuity provides guaranteed returns for a set number of years. These are often referred to as Multi Year Guaranteed Annuities – or MYGAs for short.
Indexed annuities credit interest based on the market performance of the chosen index (like the S&P 500 for instance), but don’t lose value. They also fall into the fixed category since investors cannot lose their principal or gains due to poor market performance.
And finally, variable accounts primarily invest in mutual funds. They can lose value in bear markets. In some cases, they have an insurance component that might offer larger payouts at death, however.
How Are Annuities Insured?
First, all annuity guarantees are backed by the ability of the issuer (insurance company) behind your investment. Insurance companies are not lending institutions like banks. They own large portfolios of government treasuries, highly-rated corporate bonds and other investment-grade securities.
All well-capitalized insurance companies have millions (if not billions) more in invested deposits than policyholder obligations. Should an insurance company run into financial hardship, their assets would be liquidated first. Those funds are then used to pay policyholder claims and deposits.
It should be noted that it’s exceedingly rare for large, well-rated insurance companies to default on their obligations. However, it does happen occasionally with smaller poorly capitalized insurance companies.
Understanding State-Run Guaranty Associations
In the rare event the deposits of the insurance company are not enough to meet policyholder obligations, your state’s Guaranty Association steps in next. To do business in any state, an insurance company must be part of this group. In this way all insurance companies are helping to back one another.
The National Organization of Life and Health Guaranty Association is a good resource to learn more about this government-run group. It’s not FDIC (that’s only for banks), but these state-regulated organizations do provide protection up to certain limits for annuity owners.
Should an annuity provider go into receivership, their assets are liquidated, then your State Guaranty Association fills the gaps. Most annuities are insured up to $250,000. It’s highly unusual for investors to lose money because of these two layers of protection.
Why Should I Consider An Annuity?
Annuities offer protection other investments don’t. They assure stability through guaranteed growth and income during retirement. Fixed annuities can provide income for life for you and your spouse. They can also provide benefits to your beneficiaries. And when set up properly, they avoid probate as well.
And if you’re planning for retirement? Annuity accounts have you covered there as well. These investments provide tax-deferred growth allowing your funds to compound until regular payouts are desired. And fixed indexed annuities give the opportunity for higher returns based on how markets perform. This is all done without risk to your principal or previous gains.
Have questions about annuities? Contact us today!