Kim O’Brien, Executive Director
During these turbulent economic times, we hear frequently from NAFA members that while overall sales of fixed annuities are strong, consumers are hesitant to make decisions or commit their savings toany financial instrument. The indecisiveness comes from doubt in the financial strength and reliability of the issuer – banks, fund managers, insurance companies.
Fixed annuities are products that protect and preserve money because they are not subject to market declines. Immediate annuities guarantee income and deferred annuities guarantee premiums paid and declared interest or interest earned from increase in a market index. While other products try to mimic these guarantees only fixed annuities can deliver these benefits. Recent market declines show the value of the fixed annuity story.
Consumers who purchase fixed annuities from insurance companies are also protected by the constant oversight provided by state insurance regulators. These regulators continually monitor the financial health of companies authorized to do business in their state. Insurers are required to maintain a reserve of assets to be able to pay the fixed annuities guaranteed benefits. In addition, state insurance laws restrict insurers' investments so they can not invest in risky assets. The state laws allow the insurance regulatory authority to require insurers to take corrective measures to prevent insurer insolvency. Moreover, the insurance regulatory authority is also empowered by law to take appropriate steps to protect the contract owners once an insurer is in financial trouble. The regulatory authority may seek to take control of the insurer's operations. Depending on the circumstances, the insurance regulator may place the insurer in rehabilitation or may liquidate the insurer and transfer the insurer's contracts with other insurers who agree to pay the contract owners.
Importantly, there is additional protection to consumers – the state guaranty fund. Most states limit the guaranty fund coverage to $100,000 (this may be raised to $250,000 as states adopt recent proposed changes to the guaranty fund laws) and fifteen states offer $300,000 and $500,000 protection. State law prohibits insurers and agents from advertising the fact the fixed annuities are covered by the state guaranty fund. NAIC is currently reviewing whether information about the state guaranty fund should be included in a mandated disclosure document. NAFA has participated in discussions with the NAIC on this issue and will keep its members posted if any change is made on the disclosure of state guaranty funds. NAFA believes that consumers should be fully informed about the financial products they are considering including whether the financial product is covered by a state guaranty fund or FDIC insurance.
Consumers should also consider the ratings of insurance company’s strength and claims paying ability. AM Best reports companies with AM Best ratings of A or higher were deemed impaired less than a 5% of the time in the last 30 years and companies lower than B rating were impaired 25% of the time on average.
Also, other rating companies such as Standard & Poor’s and Weiss perform their own studies and are easily accessible both via the web and from the insurance company. Consumers should be encouraged to ask about and understand their insurance company’s financial strength. The FDIC does not publish any ratings regarding the financial safety of banks, but six independent firms do. The ratings are typically available to paid subscribers, but a diligent and search-savvy consumer can probably find information over the internet.
National Organization of Life & Health Guaranty Association
AM Best Impairment Study
Bank Sourceand Insurer Source for chart information
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