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April 10, 2024 - Whether settling a personal injury claim with a structured settlement, structuring an attorney fee, or deciding where you should place the money you have in your retirement account, one consideration should always be at the very top of your list of questions to ask before making any decisions about your financial future.
"How secure is my money?"
Although most people understandably place a great deal of emphasis on the rate of return they expect to receive when making financial decisions, returns are meaningless unless the institutions standing behind the commitments can back up their contractual promises.
A promise is, after all, only as good as the one doing the promising.
That means returns, while important, should never trump the concern for safety and security. Just ask anyone who was swindled by Bernie Madoff or any advisor of his Ponzi-oriented ilk whether safety or returns are more important.
"I'm more concerned about the return OF my money
than the return ON my money."
Mark Twain
Assessing Annuity Financial Security
Because investing in marketable securities, whether directly or through a mutual fund, can only provide a guess (albeit a purportedly educated one based on historical returns) about how secure your future will be, many smart individuals in the know turn to annuities to meet their anticipated fixed term needs.
Quick Side Bar: For an interesting analysis of long-term stock market returns and to understand how risky investing in the market can truly be, be sure to check out "Most stocks are bad for your wealth." (Financial Times, August 10, 2023.)
Whereas stocks cannot guarantee, in writing, what your future will look like, annuities can. But even here, it's not just enough to trust an annuity from any old life insurance company. It's important to fully vet the company making the pledge to secure your future.
A number of factors combine to make an annuity purchase one of the safest of all havens when it comes to guaranteeing your future provided you choose a solid company. Here are a few considerations to ensure your choice is one that will allow you to sleep at night:
Ratings: There are several independent rating agencies whose purpose is to review and evaluate the financial viability of its member companies. AM Best, the most often cited of them, specializes in rating insurance companies in the United States. Their ratings range from A++ to D. Think of it as a "report card" for life companies with A being better than B and so on.
(NOTE: The Insurance Information Institute suggests reviewing the ratings
from two or more agencies. In addition to AM Best, they recommend Fitch,
Kroll Bond Rating Agency (KBRA), Moody's, and Standard & Poor's)
Company Size/Surplus: Bigger isn't always better but when it comes to life insurers, size is an excellent barometer of a company's ability to meet its obligations. How much money the company has set aside to meet its future commitments after deducting its liabilities from its assets is indicative of their financial wherewithal. AM Best ranks companies by their Financial Size Categories (FSC) from Class I (less than $1.0 million in surplus) to Class XV ($2.0 billion or more in surplus).
History: How long a company has been making good on its financial commitments speaks to how dependable they have been in the past and provides reassurance for the future. Whereas stock investing always carries the "past performance does not guarantee future performance" caveat, it's not like that with annuity providers. Here, length of time in business, because of how life insurers are structured, gives you confidence the company will come through when your money is due just as they have in the past.
(NOTE: Most of the life companies we represent have been in business for over one hundred years. They have weathered some of our nation's most tumultuous financial times and not only weathered them but emerged even stronger.)
Regulation: To combat the risky liberties some life insurers were taking in the 1980s-early 90s resulting in some life company impairments requiring state insurance department intervention, the National Association of Insurance Commissioners (NAIC) modernized their method of evaluating life insurance companies. Perhaps the most important regulatory improvement was the 1994 adaptation of Risk-Based Capital (RBC) requirements. Since then, only a handful of life company failures have occurred and all of them have been smaller companies with none of them exceeding a FSC of X.
Put It All Together
If not losing money is an important goal, you'd be hard-pressed to look any further than to an annuity from a large, highly rated life insurance company with a long track record of making payments on time like the ones we're proud to represent. These companies pay their bills, and you can feel confident they will pay YOU when they say they will.
BONUS: And as if security wasn't enough, most annuities are paying guaranteed and projected (based on life expectancy) returns that are at or near fifteen-year highs, so timing is excellent to lock in and secure your future with an annuity.
In Closing
Special thanks to industry colleague Greg Micoletti, Director of Structured Settlements for American General Life, whose insightful research presented last year to the National Structured Settlements Trade Association (NSSTA) about the financial strength of the insurance industry was the catalyst for this newsletter. One of my favorite takeaways from his presentation was this very reassuring observation:
Since the implementation of the regulation improvements referenced above,
not a single AM Best Class XV company has been impaired.
(For a more detailed summary of Greg's excellent research, please email me.)
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