When you ask annuity owners why they purchased their annuity, the answer often involves one of the many benefits that they offer: Tax deferral, safety, access to funds, guaranteed principal, and lifetime income stream. But if you then ask them what having those benefits really means to them, many of them will, after a deep pause, answer, “It allows me to sleep at night knowing that my money will be there when I need it the most.” Annuities are different things to different people, but for most annuity owner’s annuities are sleep insurance.
Why an Annuity
If you ask most people today what keeps them awake at night, among the answers you are likely to get is some variation of “having enough money to retire on”. The baby boomers, especially, are facing a serious predicament as their retirement funds have been depleted through market declines. Coupled with the likelihood that they will live as much as a quarter of their lives in retirement, their greatest fear is the possibility of outliving their income sources. Even lifelong savers are tossing in their sleep wondering if their savings will last longer they do.
There is only one type of investment vehicle that can be purchased by an individual that can provide the reassurance that many people need at retirement. At their core, annuities are a secure source of income that is payable for the lifetime of the annuitant. The income is stable, predictable and the life insurance companies that issue them guarantee it.
There may be some annuity owners who still sleep with one eye open to keep watch on the life insurance company that issued their annuity. With all of the bank failures that have occurred in the last several years, depositors are anxious but somewhat reassured that their money is safe due to FDIC insurance. It is true that annuity deposits aren’t federally insured like bank deposits. Rather, they are backed by the financial strength of the issuing life insurance company and secured by many safeguards that have been put in place by state regulators.
Life insurers are regulated by the states in which they are domiciled. Each state establishes very strict requirements for life insurers in setting aside sufficient reserve assets that are available to meet future obligations. A substantial portion of each premium dollar the life insurer takes in must be set aside in order to cover future claims. This, along with frequent examination of life insurers’ books by the states ensures that the future obligations of policyholders will be met.
Additionally, many life insurers have a stated policy that they must operate at a surplus, which means that, their assets should always exceed their liabilities. The not only ensures that they can remain solvent in the worst of economic conditions; it also means that they will always have sufficient reserves to meet future obligations.
There is also something called reinsurance, which many life insurers participate in when they foresee that potential claims could put their reserve at risk. This is often done when an insurer underwrites a large claim or has accumulated a basket of high-risk claims. The reinsured amount protects the assets of the insurer should the claims result in a bad experience.
Protection for the Annuity Owner
Annuity owners who get nervous over the financial condition of a life insurer do have an out. They can simply transfer their annuity assets to another life insurer through a 1035 Exchange allowed by the tax code. Such a transfer could trigger a surrender fee if it is made prior to the end of the current contract’s surrender period, however, for peace-of-mind, that may be a small price to pay. The good news is that there are no tax consequences when a direct transfer is made from one annuity to another.
The track record of the life insurance industry should ease any concern an annuity owner might have. The combination of the legal reserve system, strict state regulations, industry safeguards, and the overall financial stability of the industry has protected policyholders for decades and makes it very unlikely that one will suffer any kind of loss in the future.
At SK Financial Group, we pride ourselves on helping our clients make the decisions that are right for them. When you are ready to get your financial plan set up, please do not hesitate to Contact Us. Our experience, expertise and dedication will be another asset in your portfolio. We are based in Sewickley, PA and proudly serve the Pittsburgh area and beyond.
Article courtesy of freeannuityrates.com