Introduction
Annuities can be complex and difficult to understand. So, the last thing a retiree or someone close to retirement needs is their annuity company to fail! Although all states have guaranty associations to help provide some coverage, this process may take months to even years and annuitants may still not get back everything they initially invested. Coverage varies by state and usually has a maximum coverage per policy.
This article provides a checklist of items to use when reviewing companies while shopping for annuities. Some specific companies are referenced as companies to avoid in the article, but this checklist is intended to be used to research any company offering annuity or other insurance products.
Checklist
Financial Stability and Ratings
Credit Ratings: Companies with low or declining credit ratings from agencies like Moody’s, S&P, or A.M. Best pose a higher risk of default, which could jeopardize the annuity payments.
A simple Google search is usually sufficient to find the latest credit ratings for an insurance company. But these should also be available from the broker or agent you are dealing with.
Be aware that many annuity providers are subsidiaries to larger companies. It may take a bit of research to understand the nuances of the holdings and companies that provide the capital and liquidity to back the annuity product you are purchasing.
Solvency Ratios: Poor solvency ratios indicate potential financial instability, raising concerns about the company's ability to meet long-term obligations.
In the United States, insurance companies are required to report their solvency ratios to state regulators, which makes them publicly available. There are three primary ratios that are typically reported:
| Ratio | Description |
|---|---|
Liquidity | This ratio compares the liquid cash or cash equivalents to liabilities. The more cash a company has on hand the more likely it is to pay its liabilities when they come due. |
Debt to Asset | This ratio compares a company’s debts to its assets, the higher the assets, the higher the percentage of equity. The lower the equity, the higher the risk of not being able to pay out claims. |
Capital and Loss Reserve |
Fee Structure and Hidden Costs
High Fees: Excessive fees, including administrative fees, mortality and expense risk charges, and surrender charges, can significantly reduce the net return on the annuity.
Opaque Costs: Companies that are not transparent about their fee structures should be avoided due to the potential for unexpected costs.
It is key to get a full understanding of all the costs and fees associated with an annuity product. This is an area where a certified financial planner or certified retirement planner can be very helpful.
Customer Service and Reputation
Customer Reviews: Negative customer feedback regarding service quality, ease of claims processing, and responsiveness can indicate systemic issues.
If you have ever bought anything from Amazon, you know the importance for a product of having numerous good reviews. If we can be this diligent with the dish soap we buy or the Airbnb we rent, we can certainly put in the time to research the companies offering annuities these days! This can be as simple as hearing from a friend who has worked with a certain company to another Google search of the company.
Regulatory Actions: Companies with a history of regulatory violations or sanctions may be less trustworthy.
Product Flexibility and Features
Lack of Customization: Companies offering rigid products without options for customization may not meet individual needs effectively.
Although this is less likely in today’s marketplace, this is certainly an important factor since most people are looking for annuities to fill in the gaps of their retirement plan. Personal finance is exactly that, personal. Customization will be key for any potential annuitant to ensure they get the security they are looking for.
Limited Riders: Lack of beneficial riders, such as inflation protection or long-term care riders, can limit the value and protection an annuity provides.
It must be kept in mind that with riders come higher fees. The cost of the fees will need to be weighed against the potential benefit of the rider under consideration. Does the benefit of leaving a legacy for a spouse or other loved ones outweigh the fee? Does the benefit of long-term care options outweigh the fee, etc.
Transparency and Disclosure
Complex Terms and Conditions: Avoid companies that provide overly complex contracts with terms that are difficult to understand.
Again, ensuring you completely understand the fees, costs, terms and conditions is key. This is where a good fiduciary plays an important role.
Yield and Performance History
Low Historical Returns: Companies with a track record of low returns compared to industry benchmarks may not be the best choice for long-term growth.
Inconsistent Performance: Volatility and inconsistent performance in investment options can undermine financial planning goals.
Performance is relative. Keep in mind that you cannot compare an annuity to a low-cost Vanguard Market Index Fund. This is where comparison shopping is important. Consider comparing the same type of annuity across several different companies to get an idea of the returns you have available to you. And of course, past performance is no guarantee of future results!
Companies to avoid per (follow the link to see the methodology used in determining the list)
- CL Life & Annuity Insurance Company
- Talcott Resolution Life and Insurance Company
- Talcott Resolution L&A Insurance Company
- EquiTrust Life Insurance Company
- Investors Heritage Life Insurance Company
Recommended Companies and Products
Conclusion
Insurance companies have and will default. But there are plenty of financial advisors that see that risk as very minimal. In fact, from 2008 to 2015, the Great Recession, not one provider with outstanding annuity obligations defaulted. And although not as secure as FDIC insured securities, annuities and the companies that sell them are regulated by state agencies. At the end of the day, however you view the risk, the checklist above will certainly help you make an informed decision.