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What Happens if Your Insurance Company Fails? CBS News

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The economic climate of the past few years has caused consumers to question the certainty of nearly every type of investment product. Doubt is frequently cast toward insurance companies because of their position in the financial framework of our economy in addition to the number of spectacular failures in the banking industry, as mentioned in a recent article on CBSnews.com- read the article here.

This article basically talks about how to take protective measures that go beyond simply choosing to invest with a safe company. I expected to see a little more information regarding how annuities are treated when an insurance company fails but let’s first go over a brief summary of what the article does state.

First of all, a thorough discussion is offered as to how state guaranty associations protect annuity purchasers, much like the FDIC protects bank deposits. It is important to understand the coverage limitations that exist with your home state association. For annuities this will range from $100,000 to $500,000 depending on your state of residence.

Second, the author points out some critical information regarding the difference between failures at insurance companies vs banks. In the author’s words…

It’s hard to start a “run on an insurance company” like a “run on a bank.” While you can always withdraw the money from your bank accounts, you would have to die for life insurance benefits to be paid, and with immediate annuities, you’d have to wait each month to receive your check.

Also of note is the fact that banks are more highly leveraged, thus more susceptible to failure. Generally speaking, an insurance company’s liabilities are not much greater than its assets whereas a bank typically will have liabilities many times the amount of assets on hand. Which seems like more prudent financial management to you?

Lastly, the author offers some simple suggestions as to how you can protect yourself. Research your state guaranty association and keep individual purchases below the limit even if you have to use multiple companies to do it. And, only invest money with highly rated companies who have an excellent track record of conservative management. I know it sounds simple but you can’t even imagine how many people overlook these easy steps.

In this article we found a simple approach that shows why insurance companies are safe and what consumer protections exist. Now let’s also talk about what happens to your annuity if the company does fail.

Most importantly, annuities are backed by a conservative mix of corporate bonds and government treasury notes. Financial hardship is likely unrelated to the general company account that holds annuity assets. In the case of AIG, failure resulted from the company’s exposure to the sub-prime mortgage market. AIG’s fixed assets stayed in tact and annuity payments were made as promised. No consumer lost money from an annuity contract as a result of AIG’s reckless financial management. And that was a big one!

Had the company been allowed to fail without government assistance, the profitable portion of the company assets would have easily been sold to healthy institutions who would have carried the guarantees to term. You see, the problem was never the insurance business but the fact that executives used profits to further leverage the company with extremely risky assets.

When Conseco failed in the mid-90s, profitable lines of business like annuities were sold off to healthy insurers. Visitors to Annuity Straight Talk have showed me two original Conseco contracts issued before the failure that are now owned by separate insurance companies. Those contracts were not negatively affected by Conseco’s troubles and went to term and beyond with all contractual guarantees intact.

Nobody wants to see their insurance company fail but it certainly doesn’t indicate the end of the road. I know how it works. I’ve seen it in action. Annuities are extremely safe, and that’s all there is to it.

Have a great week!

Bryan J. Anderson
800.438.5121
[email protected]

Are Annuities Safe?

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This is a common question that puzzles many people, and unfortunately mis-information usually results in sweeping mis- judgments. Investors, of course want to know that their funds are safe and that their income is secure.  Too often, sales people don’t take enough time to understand the underlying strength of the insurance industry and the individual companies that back up annuities.  In many cases, annuities and insurance products may be much safer than bank deposits with FDIC guarantee!.

The FDIC Guarantee gives a lot of security to savers, however in recent press, the FDIC has all but said it is bankrupt.  FDIC insurance rates- the fees the Banks pay to the FDIC for the insurance on the deposits- have increased 6 to 10 times in recent months,   it is quite possible that as an insurance company, the FDIC is so insolvent and is squeezing its ‘customers’ the banks so hard that it may contribute to smaller banks going out of business.  Combine the banks rising cost with their souring loan portfolio, and it’s a tough climate.

So while the FDIC emblem on the bank is a good selling point, the strength behind it is the Government printing press, and that engine may be of questionable worth in the years to come.

Insurance companies are different. They are not part of the FDIC system, but instead have actual, real cash dollars in reserves.  In addition, each state regulates insurance companies and many states have guarantee funds that back the individual investments the insurance companies manage on behalf of their customers.

Too often, misinformation or bad press clouds the fact that insurance companies are very safe, hold huge cash reserves, and offer equal or stronger guarantees than FDIC insured banks.

We can help you answer the question, Are annuities safe? and learn more on how to select the right annuity if it’s appropriate for your retirement income needs, in The Annuity Report.

 

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Pros and Cons of Fixed Annuities

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The Pros and Cons of Fixed Annuities are the easiest of all annuity products to understand.

1) You invest money with the insurance company and they pay you interest.

2) When the investment term has expired, you can elect to have your account balance paid out as a stream of income or you can take the entire lump sum and go elsewhere.

That’s as simple as I can put it. Of course there are various pros and cons to understand to determine if a fixed annuity is right for you.

Pros and Cons of Fixed Annuities: Pros

The benefits of fixed annuities are quite clear…

Guaranteed Interest- You can lock your interest rate for the life of the contract with a CD-type annuity or choose a floating rate that moves up or down according to normal interest rate fluctuations. Either way, your interest is guaranteed to not go below a certain level as specified by the contract.

Tax Deferral- Accumulation within the contract happens on a tax-deferred basis so you have the benefit of additional compounding that gives an effective yield that outpaces other safe cash investments.

Free Withdrawals- Every contract comes with a provision that allows you to take anywhere from 10-15% of the account balance annually without penalty. This can be used to meet minimum distribution requirements in retirement accounts or for discretionary expenses. The money is yours so do whatever you want.

Ultimate Safety- Insurance companies are much more conservatively capitalized than banks so the guarantees mean more, in my opinion. The insurance industry has a much lower default rate than the banking industry and all states have an insurance guaranty fund that matches, and in some states, exceeds insurance provided to banks via the FDIC.

Pros and Cons of Fixed Annuities: Cons

The disadvantages of fixed annuities are equally as clear…

Surrender Periods- Fixed annuity contracts require you to keep your money invested for a specified period of time. In exchange for your commitment to keep your money with the company, there is no up-front sales charge for your purchase. The investment term is known as the surrender period and there is a back-end charge if you fail to fulfill your end of the deal. The surrender period must work within your time horizon. If you need more money than is available via free withdrawal before the end of the contract, this product is not for you.

Conservative Growth- Fixed annuities will never make you rich. They are meant for asset preservation and safe appreciation. These products work just before or during retirement because of safety; don’t expect rapid growth. If you’re a golfer then you know to use a driver on the fairway and a putter on the green. Consider this the best putter money can buy, but keep it in your bag until the time is right.

 Pros and Cons of Fixed Annuities: Summary

For now, that’s about all I can say about fixed annuities. Proper placement in a retirement requires expert advice and analysis. In addition, there are thousands of available products and even more agents selling them.

That’s why you need The Retirement Income The Right Way Reportso you can understand the specifics of fixed annuities in detail. This valuable creation is available for free download from this website. From this report, you’ll learn how to tell the difference between a good product, company or agent and a bad one, and can weigh the pros and cons of fixed annuities for yourself.  Simply enter your name and email in the form below.

Pros and Cons of Fixed Annuities This product is the easiest of all annuity products to understand.  You invest money with the insurance company and they pay you interest.  When the investment term has expired, you can elect to have your account balance paid out as a stream of income or you can take the entire lump sum and go elsewhere.  That’s as simple as I can put it.  Of course it does get more complicated but that’s why I did so much work to give members of this site all the tools they’ll need to make a good decision. The benefits of fixed annuities are quite clear… Guaranteed Interest- You can lock your interest rate for the life of the contract with a CD-type annuity or choose a floating rate that moves up or down according to normal interest rate fluctuations.  Either way, your interest is guaranteed to not go below a certain level as specified by the contract. Tax Deferral- Accumulation within the contract happens on a tax-deferred basis so you have the benefit of additional compounding that gives an effective yield that outpaces other safe cash investments. Free Withdrawals- Every contract comes with a provision that allows you to take anywhere from 10-15% of the account balance annually without penalty.  This can be used to meet minimum distribution requirements in retirement accounts or for discretionary expenses.  The money is yours so do whatever you want. Ultimate Safety- Insurance companies are much more conservatively capitalized than banks so the guarantees mean more, in my opinion.  The insurance industry has a much lower default rate than the banking industry and all states have an insurance guaranty fund that matches, and in some states, exceeds insurance provided to banks via the FDIC. The disadvantages of fixed annuities are equally as clear… Surrender Periods- Fixed annuity contracts require you to keep your money invested for a specified period of time.  In exchange for your commitment to keep your money with the company, there is no up-front sales charge for your purchase.  The investment term is known as the surrender period and there is a back-end charge if you fail to fulfill your end of the deal.  The surrender period must work within your time horizon.  If you need more money than is available via free withdrawal before the end of the contract, this product is not for you. Conservative Growth- Fixed annuities will never make you rich.  They are meant for asset preservation and safe appreciation.  These products work just before or during retirement because of safety; don’t expect rapid growth.  If you’re a golfer then you know to use a driver on the fairway and a putter on the green.  Consider this the best putter money can buy, but keep it in your bag until the time is right. For now, that’s all I can say about fixed annuities.  Proper placement in a retirement requires expert advice and analysis.  In addition, there are thousands of available products and even more greedy agents selling them.  That’s why you need The Annuity Report so you can understand the specifics of fixed annuities in detail.  This valuable creation of mine is available for download with a free membership to this website.  From this report, you’ll learn how to tell the difference between a good product, company or agent and a bad one.