The simplest description of an income annuity is this: It’s insurance against living so long that you outlive your money. An income annuity is the only financial product that offers pension-like income that lasts for the rest of your life.
Figuring out the details of buying an income annuity stops many people from considering one, though. And the current environment of low interest rates has some potential buyers wondering whether an income annuity in one of its many forms is both timely and safe.
Three perspectives on interest rates
One perspective is from the point of view of the consumer, who wonders whether current economic conditions make this a good time to buy without losing out on potential improvements in income payouts with higher interest rates in the future — and whether at the same time the guaranteed payouts are safe.
The second perspective is from the insurance company that sells annuities. With interest rates low, they have to analyze current and future interest rates and consider how they’ll invest the annuity reserve assets. This information enables them to set payments at a level they can guarantee for decades into the future.
Third, insurance regulators and rating agencies continuously examine the insurance companies to make sure they have enough reserve assets and surplus to cover future guarantees. The best, most secure companies have ratings of “A” or higher.
Answering your questions
Norm is a consumer who wrote to me at Ask Jerry with a question about a form of deferred income annuity called a QLAC and the insurance companies that sell them. Norm is in his early 60s and he has worked hard for the money he has saved. He is nervous about losing it on a bad investment.
Norm’s question: Since most QLACS are sort of “one and done” (pay the initial premium and wait 15 to 20 years to receive payments), what are your thoughts if the current low interest rate environment continues for another 5 to 10 years (let’s say the 10-year Treasury doesn’t get above 3.5%?) How well do you think the top-rated insurance companies will be able to meet their contractual obligations 15 to 25 years from now? Will this be the next financial crisis, not banks, but insurance companies?
My answer: Great question.
The majority of our team at Golden Retirement (GR) comes from the insurance/annuity industry and we know a fair amount about the “manufacturing” side of the annuity business. This is the kind of know-how that we are using to help consumers like you make more-informed annuity decisions.
Let me give you my views as someone who has designed and priced income annuities, and is now advising individuals on whether to include them in a retirement portfolio.
- After deciding on the form of income annuity that fits their personal circumstances, QLAC purchasers should select from among insurance companies rated “A” or better by A.M. Best. We use A.M. Best’s Financial Strength Rating (FSR), which is an independent opinion of an insurer’s financial strength and ability to meet its ongoing insurance policy and contract obligations. Interestingly, some of the most price-competitive QLAC companies are those rated even higher than “A.”
- Insurance companies do not invest only in Treasuries to fund their QLAC liabilities. Rather, they typically invest in a diversified portfolio of primarily fixed-income securities that earn a “spread” over Treasuries.
- The future income guaranteed under a QLAC comes not only from the interest credited but also from the longevity credits for those who survive to collect income. (Some buyers pass away before collecting a large number of payments, which bolsters the remaining financial pool.)
- Besides setting the standards for determining a company’s liabilities, state insurance departments require that companies have capital and surplus above these liabilities. Further, there are state guarantee funds that protect up to $500,000 in annuity payments that should cover, in most situations, expected benefits from a QLAC purchase of $125,000 or less.
Together, these facts help many consumers decide to include an income annuity in their retirement plans, along with savings, equity in a home and income from other sources.
Jerry Golden, founder of Golden Retirement, is a recognized expert in income annuities. He has studied them for nearly four decades – inventing several products himself – and offers advice and guidance to consumers. If you questions about annuities, please email Jerry or request an appointment for an in-person conversation with a Go2Income specialist. You may even get to speak with Jerry himself.