How safe are annuities? When people ask this question, they can mean very different things.
Is the institution that issues an annuity insured in the case of bankruptcy?
Money held in CDs and savings accounts is insured up to $250,000 by the FDIC or NCUA, and accounts with stock brokers are generally insured up to $500,000 by SIPC. Unlike these types of accounts, annuities are not insured against bankruptcy. Most annuity providers are considered very safe however as they are generally well regulated, extremely conservative with their money, and have strong financials. Below we will show you how to check on the financial strength of an annuity provider.
Can I lose money due to market fluctuations when investing in an annuity?
The answer to this question depends on the type of annuity.
With fixed annuities you cannot lose either your principle (the money that you put into the annuity) or any interest that the annuity has accumulated.
Indexed or Fixed Indexed Annuities
You cannot lose your principle (your investment that you put into the annuity). Many Indexed annuities guarantee a small annual rate of return (less than 2% a year) on your principle. Unless the annuity explicitly guarantees a minimum annual return, you may lose some or all of your gains on the principle investment.
Similar to a mutual fund, neither your principle or investment gains are protected against market fluctuations. This makes variable annuities the most risky type of annuity in terms of market risk.
How do you check on the financial strength of an annuity company?
Everyone has heard of rating agencies like S&P (Standard and Poors) which rate bonds. They also rate the financial strength of insurance companies, the issuers of annuities. There is also a very well respected company that specializes in rating insurance companies called A.M. Best. We recommend that you do not buy an annuity without knowing the A.M. Best rating which any annuity salesperson will be able to provide to you. The A.M. Best rating follows an A, B, C system, similar to the grades you received in school. You don’t want to buy any annuity which does not have an A in the rating (A- should be fine). There are plenty of annuity companies that have great financials (A ratings), and unlike bonds, you generally will not receive additional returns by going with an insurance company that has a lower rating.
This lesson is part of our Free Guide to Investing in Annuities. Continue to the next lesson here.
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