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annuities and issuer insolvency risk
Old 09-11-2016, 11:54 AM   #1
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annuities and issuer insolvency risk

I am considering, at some point, purchasing immediate or deferred fixed income annuities, to provide a "guaranteed" source of income, and as a sort of longevity insurance.

If I do this, one risk I would like to try to minimize is the risk of issuer default/insolvency. It seems to me one way to do that is to purchase annuities from a number of different issuers, and to stay below the applicable state guaranty limit for each purchase. This would not provide 100% iron-clad protection, but it seems better than doing nothing to address this risk.

Have any of you actually done this?
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Old 09-11-2016, 12:04 PM   #2
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Yes - I have. I have a certain % of funds that need no beneficiary, so all I want to do is maximize lifetime cash flow with that amount. I have two immediate annuities, both with A+ insurance companies, and both are well below the state guaranty amount. I can live with that risk, and the effect of inflation for this amount. I'll wait before I purchase a third. Everyone's mileage will vary.

Rich
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Old 09-11-2016, 12:35 PM   #3
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There have been no major life insurer insolvencies since reforms that were put in place after some significant insolvencies in the 1990s... there have been some but mostly smaller companies. Insurers weather the storm of the great recession quite well, particularly compared to banks. Overall the risk of loss is very low, but it is prudent to stay with more highly rated companies and stay within the guaranty fund limits.
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Old 09-11-2016, 12:49 PM   #4
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Another (perhaps common-sense) way to reduce the risk of issuer insolvency is delay your purchase as long as practical. Ratings of issuers are probably a better indicator of their strength in 10 years than in 20 years, and can be expected to be even less reliable 40 years out. And, as a bonus, your mortality credits will be higher the longer you wait, so each dollar spent can be expected to buy a higher monthly check.
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Old 09-13-2016, 10:43 PM   #5
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Excellent points! Waiting would also give interest rates a chance to rise.



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Old 09-14-2016, 04:29 AM   #6
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Did you know that the amount that you get from an annuity will not go up year to year? So if you have a long life and live forty more years, your check will be worth less than half of what it is worth today, in the last part of your life. Also when you die your family will not get any money if you buy an annuity. Vs if you had money in the stock market there is a 95% chance a four percent inflation adjusted withdrawal would have money left over for your family.

ALSO...The issuer of the annuity is investing the same money in the stock and bond market as you are but they are expecting an average 7% return. The so called experts say that it will be closer to 3% going forward, so pension funds, and annuity companies will be facing some really tough times going forward.
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Old 09-14-2016, 07:21 AM   #7
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Originally Posted by Forced to Retire View Post
....ALSO...The issuer of the annuity is investing the same money in the stock and bond market as you are but they are expecting an average 7% return. The so called experts say that it will be closer to 3% going forward, so pension funds, and annuity companies will be facing some really tough times going forward.
I used to work in the insurance industry. No disrespect, but you don't know what you are talking about. No insurer I am aware of is using a 7% investment return assumption. That would be crazy. Also, most insurer investments are in bonds... little in stocks, but some.

While persistent low interest rates are certainly a challenging environment for insurers, your prediction that annuity companies will be facing some really tough times going forward is patently wrong.
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Old 09-14-2016, 07:35 AM   #8
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Perhaps Forced is referring to the rates of return for planning used in some poorly managed pension funds (ie those type where the underfunded portion never seems to get brought up to date and often gets larger as time goes on).

If I am not mistaken, an actuary of some sort has to actually sign off on these assumptions.

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Old 09-14-2016, 07:38 AM   #9
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Perhaps, but he said "the issuer of the annuity" so that suggests he is talking about insurance companies and not pensions... though he does mention pension plans in the second part of the paragraph.

If that part of his post had focused on pension funds rather than annuity issuers then it would not have been outrageous.
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Old 09-14-2016, 07:53 AM   #10
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"Pension funds" and "Annuity Companies" are totally different in their financial structure, regulation and oversight, and management. Annuity companies, also known as insurance companies, must satisfy strict guidelines to ensure their future financial commitments are funded. If they run short, the businesses and owners are on the hook. Not so with pension funds. Those funds are owned by the pensioners, and if the funds fall short, the pensions themselves will suffer. Two totally different situations, impacts and outcomes.

Rate of return affects all insurance companies, as they must provide for future contingencies. Their primary investment vehicles have always been fixed income, so as interest rates fall they must make up the difference in higher premiums.
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Old 09-14-2016, 07:57 AM   #11
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IMHO annuities are a bad idea period. You are much better off buying a basket of high quality preferred shares (BB+ and higher) for better yield than CDs or short term high yield bonds (BB+ and higher).
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Old 09-14-2016, 08:48 AM   #12
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I have two annuities. Since I don't have a nice fat pension, this is my chicken money so when the market totally tanks like in 2008, I'll still have an income stream and not need to live off a ramen noodle diet.

My annuities are nothing fancy, just a SPIA, no beneficiaries, no inflation adjustments. When I kick the bucket, the annuities served it's purpose.
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Old 09-14-2016, 08:59 AM   #13
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IMHO annuities are a bad idea period. You are much better off buying a basket of high quality preferred shares (BB+ and higher) for better yield than CDs or short term high yield bonds (BB+ and higher).
I agree that many (most?) people who buy annuities would be better off putting their money elsewhere. But there are cases where annuities make sense. For example, an 80YO with a pile of cash can buy an inflation-protected annuity and have a better overall lifetime income stream than they could provide on their own using safe investments. This is due to the mortality credits they get--if they live longer than average, they'll get the money left over from those who checked out early. If they hadn't boguht the annuity, they'd have to keep a lot of money aside for the unlikely-but-possible eventuality that they could live to be 100.


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Did you know that the amount that you get from an annuity will not go up year to year? So if you have a long life and live forty more years, your check will be worth less than half of what it is worth today, in the last part of your life.
Not always. It is possible to buy an annuity that adjusts the payout every year for inflation. They are (much) more expensive to purchase than annuities that pay a fixed return, especially in today's environment of low bond rates. As noted above, annuities can make sense in some situations, but they are (IMO) far and away the exception.
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Old 09-14-2016, 09:36 AM   #14
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The only annuity I own is a deferred annuity solely for the tax shelter benefit. I learned long ago that annuities are only good as long as you don't annuitize the income stream.
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Old 09-14-2016, 10:56 AM   #15
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Not always. It is possible to buy an annuity that adjusts the payout every year for inflation. They are (much) more expensive to purchase than annuities that pay a fixed return, especially in today's environment of low bond rates. As noted above, annuities can make sense in some situations, but they are (IMO) far and away the exception.
There are also a few true "longevity insurance" products which a few ER forum members have talked about buying, where you give a lump-sum amount to an insurance company in your 50s/60s, and in return, you get a decent monthly payout when you reach 80 or 85. The obvious downfall is that you (and your estate) get nothing if you die before reaching the payout start age, and you also take risk of inflation being higher than expected...but for a relatively small one-time premium, you get a decent-sized return if you end up living to 85/90+. When viewed truly as an insurance product, it can do well in helping protect against the risk of not having enough when older, in addition to locking in 'guaranteed' returns on your one-time payment.

Just like any other insurance product (health, homeowner's, umbrella) is never "worth it" if you never collect - but it's purpose is to mitigate risk. Its purpose is not to advertise giving you the best possible return.
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