Product Rating Agency part 1

How do retirement-conscious Americans get unbiased, third-party annuity product information? Well, they can’t, because it doesn’t exist. If Americans find opinions about annuities on the Web or in their community, they likely come from an annuity agent who’s trying to peddle his products.

So, how would you create a fixed annuity rating system that would help consumers purchase the best annuity products?

First, we know the strength of the insurance company is the foundation of all annuity deposits. Insurance companies go out of business primarily due to sub-par investments that back the underlying annuity or insurance policy. Still, each insurer has its own sad story of failure. With Executive Life, for instance, it involved junk bonds underwritten by Michael Milken and Drexel Burnham. Commercial real estate and bad properties did in the once old-line company AAA Mutual Benefit. Standard Life of Indiana’s demise resulted from a lack of capital and a portfolio that overdosed on preferred bonds of mortgage giant Freddie Mac.

And don’t forget the mother of all insurer collapses, American International Group. AIG took risks with annuity holders’ assets that would make a riverboat gambler weep. But, as everyone knows, not one American lost a dime with AIG. Well, sort of. That’s because the Fed stepped in and bought the company and its liabilities for around $152 billion. Remember, though, most insurers never reach liquidation. Instead, they get consumed by larger insurers looking to take over weaker ones. And, while annuities have no federal guarantees, they are backed by state insurance guaranty corporations for at least $100,000.

When choosing an annuity, your first task should be a simple one: measure the strength of the underlying insurance company. A ratings agency is the place to start your research. Insurance companies are rated by the following agencies: A.M. Best, Standard & Poor’s, Fitch and Moody’s. Each agency rates many or all insurance companies on the strength, solvency and claims-paying abilities of the underlying insurer. I recommend that an insurer’s A.M. Best rating be A- or higher, its Standard & Poor’s or Fitch rating be at least an A, and its Moody’s rating be at least Baa2. That said, some top-rated companies don’t offer fixed annuities or fixed-index annuities, and if they do, their products probably aren’t competitive. There’s usually a trade-off between company ratings and product competitiveness. Make sure you research your choices on the internet. It’s not this simple, but it’s a good place to start when buying a fixed annuity. Next week I will dig deeper into how to choose an insurance company and outline important policy features to look for. Buckle up; this is a long ride!

Pay it Forward:

Recent college grads are coming home in a few weeks, and many are coming home jobless. My advice is to start charging your graduate a monthly fee for rent and food. This builds responsibility and forces them to get off the couch and find a job. Start charging them sooner rather than later to prevent a 20-year stint in your basement.






Earl E Bird

I'm Earl E. Bird and I am very concerned about saving for my senior years. I am amazed at the stumbling blocks that exist when saving for retirement. That's why I take my time when making decisions on building my nest egg.

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