‘Transfer Your Risk’ with Annuities
01/04/2012 12:01 am EST
If you’re worried about any of these four important risks, it pays to do more research to see if annuities are a fit within your portfolio, writes Stan Haithcock of StantheAnnuityMan.com.
Ask yourself this question: "How much risk within my portfolio am I shouldering right now? 20%? 50%? 100%?” Are you tired of the constant rollercoaster ride? Maybe it is time to transfer some or all of your risk using specific annuity strategies.
As I enumerated in a recent MoneyShow.com article, annuities primarily solve four things (the easy-to-remember acronym is PILL):
- P rincipal protection
- I ncome for life (immediate or target date)
- L egacy, or Leaving money to your heirs
- L ong-term care (while retaining full control of your money)
So if your portfolio goals involve one of these four scenarios, you need to consider solving for that goal contractually by transferring the risk to an annuity/insurance company to achieve the guaranteed results you desire.
If you want an income stream you will never outlive…transfer the risk to an annuity. If you want long-term care coverage while still retaining control of your money…transfer the risk to an annuity. If you want to leave a guaranteed legacy with contractually guaranteed growth…transfer the risk to an annuity. If you want principal protection and tax-deferred growth…transfer the risk to an annuity.
Transferring the risk to an annuity/insurance carrier to solve a specific need or goal is the only reason annuities should be considered within your portfolio. That risk transfer is backed up by three layers of protection:
- The carrier that issues the annuity
- The state-specific guarantee fund that backs up the annuity
- The annuity/insurance industry “conglomerate”
Exploring each of these in more detail…
The Issuing Annuity Carrier
The company that issues the annuity policy is the primary source backing up the contractual guarantees of your annuity.
You should look at the ratings of the company (AM Best is a primary source), along with the balance sheet and bond holdings of the issuing annuity carrier. Your agent or advisor should be able to assist you with your due diligence.
My advice is to use your research experience and common sense when deciding on a carrier and specific product. For example, if a carrier has a lower rating and yet offers the highest guarantees, that might be a red flag.
State-Specific Guarantee Fund
Annuities are regulated at the state level, not at the federal level like securities. Each state has a specific guarantee fund that backs all annuities issued in that state.
To find out the coverage for your specific state, go to www.nolhga.com. NOLHGA stands for the National Organization of Life & Health Insurance Guarantee Associations. If something goes wrong with the carrier, this is the next level of protection (after the carrier) for your money. By the way, an agent or advisor cannot use the state guarantee fund in sales materials or within their recommendations.
The NOLHGA is not FDIC insurance like you have with your bank account, even though some agents and advisors love to make that correlation. Both provide coverage, but they are completely different animals.
The Annuity Industry "Conglomerate"
This is my opinion after decades of experience, but I know that I am right on this issue: At the end of the day, annuities are “confidence” products, period.
Believe me, the annuity and insurance industry knows this, and definitely makes sure to protect this ongoing confidence with clients and future clients. In other words, the industry pretty much self-regulates in order to keep this “confidence” in place.
For example, when AIG was having some “issues” with its derivatives arm and the AIG brand was being called into question, there was a bidding war to buy up the life and annuity division of AIG. Why, you ask?
Because the industry wanted to ensure the public didn’t lose confidence in insurance and annuity products.
MetLife ended up being the highest bidder and absorbed all of the AIG annuity clients and the contractual obligations that were in place. Another recent example of the “conglomerate” absorbing a carrier is when Standard Life of Indiana was purchased by Guggenheim Partners.
In both cases, any question about the carrier was wiped clean by the purchaser and the ongoing consumer “confidence” remained unharmed. The bottom line is that when compared to other places that you can put your money, annuities are a safe place for a portion of your portfolio.
So when you get a chance, take a look at your portfolio (and goals), and do a little risk inventory. How much risk are you shouldering? How much risk do you want to personally shoulder?
It might be time to transfer the risk to an annuity to solve for principal protection, income for life, legacy, or long-term care.