Annuities are as Good as the Company Behind Them
Think of your annuity as the warranty on your vehicle.
Imagine after nine years of ownership an issue arises
that requires attention from the vehicle manufacturer.
You have a written warranty in your hand that says
specifically the warranty will cover anything from
bumper to bumper for ten years, period. So you pop
into the local dealer and tell them you need such and
such fixed. As you approach the counter, warranty in
hand, the counter person starts to sweat and look a
“I need my air conditioner fixed,” you say politely.
“Sure, no problem” and the counter person goes off into the back to talk to his manager.
The manager steps out moments later to tell you that there will be “some delays” in the repair due to “unforeseen labor cost increases” or something like that and that you will have to come in next month to review the matter....So you do just that and eventually your air conditioner gets fixed, albeit with annoying delays...
Now this is a rather extreme example, as the vast majority of annuity insurers can handle all claims presented to them, whether that be a surrender claim (early redemption) or a death claim. And were an insurer to actually have financial problems, that company is usually taken over by another insurer where the contractual guarantees usually remain honored.
Most states also have guaranty associations as well that that protect policyholders within certain limits in the rare circumstance that an insurer must be put into receivership by the state.
You certainly also have a legal contract binding the insurer to redeem your funds back to you.
But everyone needs a sturdy reminder that one should always choose an insurance company based on its “ability to pay claims”, also known in the industry as the financial measure of an insurer’s strength.
How is the average consumer supposed to know enough to make a safe decision?
By starting with the Rating Agencies, and, as many of those as you can find. Rating Agencies have been charged with the task of rating everything from sovereign governments to debt issues. It is always a smart idea to learn about the ratings of an insurance company whose annuity you may be getting...(Make sure to read “Rate the Raters” in the “Annuity Monthly” section of this website as well so that you may understand the efficacy of the rating system).
There are as many as 4 rating agencies: AM Best, Standard an Poors, Moody's and Fitch that individully rate insurance companies. In their entirety, they comprise a “Comdex” score, which represents an average percentile rating of your insurer. The higher the Comdex score, the higher the insurer is in relation to its peers. If a company has a Comdex score of 75, that means this company is over all rated higher than 75% of the other insurers in the marketplace.
There is also the Weiss Rating Agency, an independent and tough rating agency that typically will rate insurers lower than any of the other 4 agencies. Since they rate companies lower, this can be confusing to a consumer, so make sure you weigh the Comdex score with the Weiss score for a balanced approach. Weiss also has a pretty good success record in determining insolvencies.
Once you have studied the ratings of your carrier, and studied the contractual guarantees inherent in your policy to your own satisfaction, you should then feel comfortable enough to proceed with the funding process.