Is This Annuity Company Right for You? How to Find the Right One

Millions of Americans depend on annuities for retirement saving, protection, and income. If you are considering an annuity for retirement, the right annuity contract can help make a difference in you reaching your goals. But first, you need to make sure that an annuity truly fits your financial situation and objectives.

The search starts with making sure that you have a solid insurance company issuing your annuity contract. Why is this so crucial?

How Will the Annuity Company Keep Its Promises?

As the contract issuer, the insurance company will make certain promises to you with its contractual guarantees for a period of time. In many cases, this time period often lasts for a long while. For instance, the annuity company may pay you a guaranteed income stream for the rest of your life.

While they typically offer some money access, annuities aren’t designed to be the most liquid of instruments. An annuity is a long-term commitment, so you want to be sure the insurance company that issues your contract will be around to uphold its obligations to you.

Here are a few things to keep in mind about annuity companies when exploring your annuity options from different insurers.

1. What Products Does the Annuity Company Offer?

First and foremost, the annuity product is the most important part of the equation. What role or solution will an annuity play in your portfolio?

Every annuity has different features and benefits. You want to be sure the unique features and benefits of the contract you are choosing fit that role or solution you are looking for in your financial line-up.

Some annuities pay an upfront bonus on new money that is placed into the contract. Meanwhile, others come with guaranteed income riders or other features that offer growth or protection.

Look for annuity companies offering a competitive suite of fixed and fixed indexed annuity contracts that meet your needs.

When Is Less More?

Here is a good thing to keep in mind. The more benefits and features – bells and whistles – that an annuity has, the more that you are giving up in some form or fashion.

If an annuity is built for growth, chances are its income payouts won’t be as competitive as payouts from other annuities will be, for instance. In other cases, you may wind up paying more money into the contract for additional contract benefits or features.

On the other hand, you may have a fee being charged against the money inside your annuity for certain benefits, such as for enhanced benefits or for the income rider benefit.

If one of your annuity options has more bells and whistles to them than others, it’s good to evaluate whether how those things are priced into the contract are more worthwhile.

Your financial professional should be familiar with the superior choices on the annuity market. They can help you narrow down the insurers and contract options that make the most sense for you.

Judging What Benefits and Features Make Sense for You

The most important factor is that the features and benefits of the annuities should align with your specific goals.

Do you want to protect your money from market risk and have predictable growth? Products of the traditional fixed annuity or multi-year guarantee annuity variety may be right for you.

Do you want a guaranteed income but still have some access to your money? Then a fixed index annuity product with an income rider benefit may be worthwhile to explore.

Or what if access to your money doesn’t matter to you? Then deferred income annuities or immediate annuities might be an option, depending on your timeline for needing income.

Your financial professional should ask you in-depth questions to determine your needs and then help you find life insurers as well as annuity contracts that fit them.

2. What Is the Annuity Insurer’s Financial Strength?

Life insurance and annuity companies are “graded” by major credit agencies on their financial strength. These agencies include Moody’s, Standard & Poor’s, and Fitch.

Annuity and life insurers who have been around for several years tend to have higher ratings, whereas insurers that are newer to the market may naturally have lower grades. Grades can range from AAA or A++ to C or D (the latter grades being reserved for financially insolvent insurers).

By law, insurance companies must maintain dollar-for-dollar reserves for every dollar of fixed annuity premium they collect. And this brings us to an even more important point: an insurance company’s solvency ratio.

How Do Life Insurer Solvency Ratios Work?

A solvency ratio is the surplus capital reserves an insurer holds above the dollar-for-dollar reserve minimum. If an insurer has a solvency ratio of 102, it would have $1.02 in reserves for every $1.00 of outstanding annuity premium.

While some insurance companies may have lower ratings by the credit agencies, they can have (perhaps surprisingly) higher solvency ratios than the companies with A ratings. That helps bolster these companies’ ability to make good on their contractual promises to you.

Don’t dismiss B-rated insurers out of hand. If you find contract opportunities with guarantees of highly attractive interest rates like 2.5% or greater in this low-rate environment, the B raters may be a solid choice.

Sometimes annuity companies in this category will offer higher payouts than their A-rated cousins might offer. In that case, checking out the company’s history of longevity and its surplus ratio is a good way to explore its ability to make good on its long-term promises.

Furthermore, even if the insurer was to become insolvent, state reinsurance parties would step in to cover the losses of policyholders up to a high amount.

Even so, life insurance companies have had strong resilience in hard times such as the Great Depression, the market crashes of the 2000s, and other trying economic periods.

3. What Sort of Guarantees Does the Insurer Offer?

The devil is in the details. While some annuity carriers may offer fixed index annuities with higher potential for interest earnings, their products may not be as strong in the way of guarantees.

 The primary reason that you buy an annuity should be for its guarantees, as many people do for guaranteed income or guaranteed protection of money from market risk.

What specific guarantees are offered by the annuity insurance company? What are those guarantees in real dollars and cents? What do the rate percentages in those guarantees mean?

Are there any cons or potential “gotcha” situations that can make those guarantees not apply anymore? How do these guaranteed benefits stack up to other such features of products from other insurers?

Understand Your Options Before Committing to Anything

Be sure to answer these questions with an independent financial professional who truly understands annuity products – and what they can and can’t do. How do you judge this?

Someone who regularly helps clients with these products will likely be a candidate with solid annuity knowledge. Here are some factors to consider with an advisor or agent as you think about possibly hiring them.

4. What is the Annuity Company’s Renewal Rate History?

If you buy a fixed indexed annuity from an annuity company, you do have potential for higher growth than you would with a traditional fixed or multi-year guarantee annuity.

How your fixed index annuity money earns interest is tied to an underlying financial benchmark. When the index goes up, your interest earnings are based on a portion of that growth. And when the benchmark index goes down, you simply earn zero percent for that period.

But while you do have growth potential, the insurance company limits the interest you earn with participation rates, caps, and spreads. In exchange, the insurer preserves your principal and earned-interest money when the underlying financial benchmark index that your annuity contract is tied to drops in value.

Remember, the insurer can change these caps, participation rates, or spreads from year to year. This depends in large part on what is happening with interest rates and other market conditions affecting the insurance company’s fixed-income investments. Life insurers can lower or increase these “levers” at their disposal.

What Can Renewal Rate Histories Tell You?

The rates at which insurance companies “renew” these growth potential controls each year are called “renewal rates.” Some insurance companies release their renewal rates to the public while others don’t.

This isn’t necessarily a positive or negative for how good that insurance company might be with renewal rates. It’s just a question of information access.

This renewal rate history also applies with traditional fixed annuities, which usually guarantee the growth rate for your money for a short period (usually a year or two). Future rates may be higher or lower, and the renewal rate history of that insurer can be a valuable clue-in.

If you are considering a fixed annuity or indexed annuity for your portfolio, ask your financial professional about life insurers that have a solid renewal rate history.

Just to be clear, an insurer’s renewal rate history isn’t necessarily an exhaustive indicator of what their future rates might be. But it can be one other way by which you can judge that insurer’s commitment to providing ongoing growth opportunities.

The Details Always Matter

Some insurance companies offer very high participation rates or caps on their contracts at the onset, along with “bonuses” to the initial premium you pay in.

Pay attention to what the company offers. It might be that in exchange for this high upfront growth potential, the insurer’s rates will be far lower in the later years of the contract.

The Buyer Beware Principle Applies, as Always

There is no such thing as a free lunch. Everytime you add more guarantees or other attractive benefits to your contract, you are giving up something else in another area of the contract.

Be sure to review these details carefully with your agent or financial advisor.

Need Help with Exploring Your Annuity Company Options?

The annuity marketplace is filled with hundreds upon hundreds of annuity products. There are also dozens of annuity companies standing behind those product selections. How can you sort through these choices and find just a small menu of what might make sense for you?

The good news is you don’t have to do it alone. By seeking help from an independent financial professional who asks a lot of questions about your needs, you can work your way through those “what-ifs” and scale down to a variety of choices that look promising.

For your convenience, many independent financial professionals who understand annuities, what they do, and what they can’t do, are available here at SafeMoney.com. They would be more than happy to have a discussion about your situation and how they can help you – at no obligation to you.

Use our “Find a Financial Professional” section to connect with someone directly. You can request an initial appointment to discuss what you are looking for. Should you need a personal referral, call us at 877.476.9723.