Credit Rating Agencies: Which One Should I Trust?

 

lost, navigation, which insurance company, best insurance company, annuity, which annuity provider is best, which insurance company is best, best annuity provider

 

When you’re looking through different annuity selections with your financial advisor or consultant, knowing which insurance offer to trust makes a big difference. Credit rating agencies rate insurance companies with a grade or percentage. This score assigned to each independent insurance agency indicates that company’s ability to pay policyholders’ claims.

 

The Big Four: A.M. Best, Comdex, Moody’s, and Standard & Poor’s

 

Financial rating services such as A.M. Best, Comdex, Moody’s, and Standard & Poor’s rank insurance companies based on their financial strength and stability. Before you invest in an annuity, check that annuity’s insurance provider’s ranking. These financial rating agencies are independent and they all have their own rating scale based on their own standards. Which rating service should you use?

 

A.M. Best: An A- and Above Means A Solid Insurance Provider

 

A.M. Best is a financial rating agency whose main focus is on the insurance sector. Only trust an annuity provider whose ranking is an A- or higher. A score of an A- or higher indicates a score of ‘Excellence’. This score means that your insurance company is able to pay you back the principal of your annuity as well as the claimed gain. The insurance company is secure and reliable. Superior scores are “A++” and “A+”. Scores lower than “A-” are vulnerable to economic conditions. Use this as your guide to the reasoning behind A.M. Best’s ranking.

 

Comdex: Look for 80% or Higher for Your BEST Annuity Ranking

 

Comdex is one of the best-ranking scales for insurance providers. The financial rating agency ranks insurance companies with a score from 1 to 100. Each number represents a percentage, and the higher the number, the better the ranking. The Comdex score is one of the best rankings that you can hold accountable for the security of your annuity because it takes all of the available ratings from other financial rating agencies and puts them all together.

 

Look for a score of 80 or higher. This means that of all of the rankings given to that insurance provider, the average score is higher than 80% of all other insurance companies. Why is the Comdex score the best? The Comdex ranking already includes all of the ratings given to your annuity by other agencies and tallies up their score in order to give you a neat, consensus of all the ratings put together.

Moody’s: The Less Trusted Ranking For Insurance Companies

 

Moody’s offers grades ranging from Aaa (Superior) to C (Failing). Aaa is given to the most stable financial institutions and indicates security. C is given to companies that are going through financial difficulty. The trouble with using Moody’s as a ranking system for your insurance provider is that it specifically doesn’t concentrate on future reliability. Rather, Moody’s focuses on the past.

 

Would you really want to only look at your insurance provider based on past creditworthiness? The ability to look into the future based on fiscal trends and economic outlook is important for your interest in annuities because they are typically integrated into your retirement plan, which is in the future.

 

Standard & Poor’s: The 150 Year Old Insurance Rating Organization

 

Standard and Poor’s (S&P) is one of the oldest rating agencies. It ranks a company’s creditworthiness by assessing its debt issues, company climate changes, and changes in insurance regulations. The grade given by Standard & Poor’s ranges from “AAA” to “D”. A score of “D” means that the company has defaulted on financial obligations. As the score moves up the ladder towards AAA, the vulnerability of the company decreases.

 

Standard & Poor’s should not be used by itself when judging which insurance provider deserves your hard earned cash because so many factors can affect an S&P score that doesn’t necessarily have to do with your annuity. For instance, if your insurance provider focuses solely on annuities, the S&P score is going to rank lower because the S&P doesn’t like a narrow business focus.

 

Which Credit Rating Agency Should I Use For Judging Which Annuity To Buy?

 

Great question. All four. If you can’t get access to scores from all four, choose Comdex and A.M. Best. These rating agencies focus on the insurance industry, rather than the business sector like the S&P and Moody’s. Therefore, if you can only squeeze two scores out of your financial advisor, choose Comdex and A.M. Best, whose standards reflect an insurance companies ability to pay back long term investments and retirement-focused financial obligations. Remember, your minimum Comdex score should be 80 and your minimum A.M. Best score should be A-. 

Who Can You Trust With Your Money: FDIC Insured Banks Vs. Annuities

lehman brothers, bear stearns, bank closes, money protected, FDIC, FDIC insurance, insurance company, assets protected, annuity protected, annuities protected,

 

FDIC Vs. Insurance Providers: Are You Protected?

The federal government requires banks to keep 10% of your CD in reserves. 10 cents of every dollar you’ve deposited is in your banks reserves. This goes for money market accounts as well as any money that you put in your bank account. On the other hand, state insurance commissioners regulate annuities. This creates a major difference because insurance companies have to keep 100% of your annuity. That means 1 dollar for every dollar of your investment. According to Forbes, if you wanted to take your annuity out of the insurance company and liquidate that asset, you would walk away with the current value of the annuity plus the current value of future obligations on those contracts.

Breaking It Down: What Is The FDIC Good For?

The FDIC has a coverage limit of up to $250,000 per depositor, per insured bank. If you share an investment account with your spouse, however, you split that $250,000 insurance coverage limit 50/50. FDIC does not insure your money market accounts, CD’s, annuities, stocks, bonds and any other financial instruments.

Lehman Brothers and Bear Stearns closed their doors, causing an earthquake in investor confidence. And there’s no need to go into detail of how many high-end investors had their hopes of an ROI dashed from the Bernie Madoff scandal. Consequently, the Reserve Primary Fund temporarily ensured mutual funds. Your FDIC confidence extends only as far as your dedication to what we’ve always been told, no matter how much it actually protects you. Annuity protection, more often than not, exceeds the insurance limit of the FDIC.

The New Financial Trend That Has Investors Sleeping Easy

The FDIC covers up to $250,000 if banks go belly up. But what about our annuities? State laws govern what happens to your annuities after you insurance fails and goes into liquidation. In Florida, for instance, your annuity is insured up to $300,000 for each contract owner. Annuities are guaranteed in Florida far more than your bank’s FDIC insurance is able to guarantee your CD’s and money market account and other financial instruments. How? If you and your spouse each have a contract, you are both ensured up to $600,000 together, rather than the flat $250,000 insurance that the FDIC extends. With annuities, you can maximize your coverage by investing in an annuity from multiple insurance lenders.

See my blog on how much protection your annuities have state by state in case of litigation, bankruptcy or debt collectors and creditors.

 

 

7 Questions to Ask Before Buying an Annuity

What to Ask Before You Buy an Annuity

Many people reaching retirement are looking for ways to improve their financial security.

It is unsurprising that many people are considering buying an annuity.

If chosen well, an annuity can prevent a person from outliving their finances. What’s more, it can provide increased protection against a volatile stock market.

As annuity will convert current wealth into a steady income, it is vital to make an informed decision.

Also, as life insurance and annuity scams are on the rise, an investor should not rush into a plan.

So, it is important to ask yourself the following seven questions when buying an annuity.

1. What is the Annuity Process?

An annuity is a big financial commitment, so you must have a firm grasp of the process.

You will be buying an insurance product, so you will need to pay one lump sum or make a series of payments.

Once you have made the payment(s), your money will start to grow at either a fixed or variable interest rate.

The insurer will then make regular payments to your account for the rest of your life.

The insurance should also entitle your chosen beneficiary to the amount. Your loved one will either receive the annuity value or the guaranteed minimum, whichever is the greater amount.

The annuity contract is a big commitment. You’ll be unable to withdraw the money until you’re 59 1/2 years old.

If you do choose to withdraw the amount, you’ll experience a penalty of 10% on the lump sum. You may also have to pay a surrender fee.

2. What are the Different Types of Annuities?

Not all annuity contracts are the same. Deferred annuities may fall into 1 of 3 brackets: fixed, variable or equity-indexed.

Fixed annuities will provide a guaranteed rate of return for a select period. You may choose between one to ten years.

While the rates might be subject to fluctuation, you are guaranteed to receive the fixed rate.

It’s one way to ensure you will not lose any money, but you will not have any room to grow your finances.

Variable annuities offer a little more flexibility, so they can also be a little riskier.

The contract is not dissimilar to investing in a mutual fund. While there is a potential to enjoy financial growth, it can also result in the plummeting of the pot.

You’ll also, more than likely, pay higher fees. The beneficiary will also owe tax on the amount.

An equity-indexed annuity is a little like a fixed annuity, as you will receive a fixed payment.

The difference is a contract can provide room for financial growth, as it’s attached to an index.

3. How Many Annuities Should I Buy?

The annuity should provide a stable income that provides you with basic living needs.

Identify how much money you’ll spend on housing, utilities, food, and transportation. You should also factor in healthcare costs, too.

You could even opt for deferred Social Security claims, so this covers your basic needs.

The annuity could then provide a supplementary income. So you can buy vacations, gifts, or home improvements.

4. What Age Should I Start Buying an Annuity?

There is nothing wrong with planning for your retirement early.

Most annuities are often aimed at people in their 50s or 60s, as they are close to retirement age.

As well as your age, you should also take a look at the market before you buy an annuity.

Annuities often have a low-interest rate, so it’s best to take out a contract when interest rates jump.

However, don’t wait too long or you could end up with no stable source at all.

5. What is the Surrender Period?

Before you embark with an annuity contract, take a look at the surrender period.

This is the length of time you will have to keep the contract before you can make a withdrawal without surrender charges.

Most contracts provide a distribution level from 5 to 15% of the initial investment sum.

You can access this on an annual basis without a surrender fee.

Should you exceed the designated withdrawal sum, you will receive a 5 to 15% charge. This charge will most likely decrease the longer you have had the contract.

It is not uncommon for investors to become frustrated that they cannot access their cash.

That’s why it is important to remember an annuity is not a cash resource. It aims to provide financial security.

6. Will Annuity Benefit My Partner?

It’s natural for married couples to consider their partner when buying an annuity.

You might be glad to learn you can invest in the protection with your partner in mind.

Most reputable insurers will provide joint-and-survivor coverage. This will allow you to buy protection at a varying rate, which will be payable to a survivor.

You may be able to choose from 50%, 66% or 100%. What’s more, the initial annuity payments might be lower compared to single-life contracts.

The investment may offer peace of mind that a partner will have financial protection.

7. How Does Inflation Work?

The inflation rate will determine the amount of money you will receive.

Many people will often take out inflation protection when buying an annuity. This can increase the payments with the rate of the consumer price index or an annual set percentage.

Inflation protection isn’t cheap, though.

Compare the market expectation of inflation against the inflation protection cost.

If the market projects a 2% inflation rise, receive an SPIA quote that has an annual 2% set up. You can then compare it against the same income with an annuity adjusted for inflation.

You can then identify the protection markup against an unexpected inflation rise.

Conclusion

Buying an annuity should never be undertaken without making an informed choice.

It is a big financial decision that could impact your retirement years.

You must explore all avenues before making such a big commitment, or you may literally pay the price.

So, only contact reputable insurance providers and consider inflation with care.

You must also factor in your beneficiary or spouse to ensure they’re protected when you die.

Have you taken out an annuity contract? Do you have any advice to share? Leave a comment below.

The Importance of Understanding The Different Types of Annuity

Understanding Different Annuities

Receiving A Paycheck For The Rest Of Your Life Sounds Great, Right? This isn’t a dream. It’s actually possible thanks to annuities.

Annuities are a form of life insurance. You pay a sum of money (called a single premium annuity, not to be confused with a SPIA). This can be either all at once or over a period of time (flexible premium annuity). In return, your money does not go down (only if you buy from one of our advisors), it only goes up (depending on the crediting option you choose).  Also if you buy an income rider (you will pay a fee, should only be about 1%) you receive regular disbursements of that money until you’re no longer living.

A staggering 84% of Americans believe that this is a beneficial concept, yet only 14% have actually purchased an annuity themselves.

A primary reason for the hesitation: A lack of knowledge around annuity options and uncertainty around purchase procedures.

It’s important to understand that not all annuities are created equal before you sign on the dotted line.

Interested in learning more? Let’s dig in!

The Big Two: Deferred Annuities Versus Immediate Annuities

Our discussion on the different types of annuity must begin with the two major categories: deferred and immediate.

Deferred Annuities

Put simply, deferred annuities are those that you don’t receive until a set time in the future. Essentially, you pay your premiums in full, then wait. Some you can add money to called a flexible premium. I like the flexible premium annuities because they allow you to make additional deposits and all of the money matures at the same time.  Again this is only available when you buy through our network of advisors. We have removed 90% of the annuities on the market and only allow the top 6-8 insurance carriers to be sold. That said other insurance people or advisors will sell you anything just to make a commission, we make sure you don’t get screwed.

The obvious advantage to this type of annuity? The longer your money sits, the more it grows. In addition, the investment remains tax-free until you’re ready to pull it out, at which time it’s taxed at the ordinary income rate. Again any return you made in the annuity comes out first and you pay tax on that.

Are Deferred Annuities Beneficial?

This type of annuity is also beneficial in the sense that it works with almost every pocketbook and timeline. Got a large sum of money you’re ready to invest? Great, you can put it all on the table and pay your premium immediately, again up to $1,000,000 (and we do a few per month that are above this number). Rather wait and pay your premium off over time in regular intervals, flexible premiums? That works too. Most annuities start at $10,000 or $25,000.

Yet, while time is on your side in that regard, it might be against it in another. The main drawback to this type of annuity is that you have to wait to access it.

If you make withdrawals before you reach retirement age, you’ll not only pay the income tax on your earnings. You will also be subject to some pretty hefty early withdrawal penalties and surrender charges, some of which could be as high as 20% of your investment when you buy outside of our network. REMEMBER do NOT allow anyone to sell you an annuity that has a surrender charge that is over 9% MAX MAX 10% and the term should not exceed 9 years. Most should be 6-7-8 years.

Immediate Annuities

The other type of annuity is an immediate one.

Contrary to deferred annuities, which have an accumulation period during which you must wait to receive your earnings, immediate annuities start paying out no more than one year after you’ve paid your premium.

While most people choose to invest in deferred annuities when they’re fairly far from retirement age, those closer to that magic number might want to invest in immediate annuities.

This way, they’ll be a shorter window of time between when they make their payment and when they begin receiving their money.

Another advantage to these types of annuity is that they can provide a useful tax break. Here’s the breakdown:

The payments you receive on an immediate annuity are divided into interest and principal.

While the interest is taxed as ordinary income, the principal on these types of annuity remains tax-free, because it is essentially a return on your initial investment. This is known as the exclusion ratio.

Yet, one of the main drawbacks to an immediate annuity? It expires when you do, so the window of time to access it might be narrow depending on when you choose to invest.

Annuity Sub-Sets

Once you’ve decided whether you want to invest in a deferred or immediate annuity, there’s one more step to take. Now you must decide if you want to invest in a Fixed (Traditional), Fixed Indexed (FIA) or Variable Deferred Annuity.

Fixed (Traditional): This type of annuity is essentially a savings account offered by your insurance agency. The agency will use its in-house portfolio to determine the rate at which your money will build interest during the accumulation period. Lock in your interest rate in order to guarantee yourself that rate. That’s the good news. Most fixed products are 3 years to 7 years. The sweet spot as of this post is 5 years.

That same lock-tight security applies to your payments on these types of annuity. The amount you receive is then set. It will not change over the course of your lifetime.

This type of annuity is one of the safest and is advisable for the more risk-averse population, generally those 60 and older.

Fixed Indexed (FIA)

While Fixed Traditional deferred annuities lock you in a certain interest rate, the interest provided under FIA (index annuity) annuities is based on how the stock market performs.

Consequently, your interest rate is determined not by an internal portfolio, but by the performance of an external index. One example is the S&P 500.

While the credited interest is subject to these external conditions, it may fluctuate during the accumulation period, but it will never fall below zero.

Variable

Interest rates are subject to market volatility. A company’s rate lock does not offer security. They could even go way below zero. It is like owning mutual funds. When the market drops 20% your variable annuity will fall even more then 20%.

Such conditions can be risky. Your insurance company will set a minimum payment amount at the onset to ensure that no matter how the market dips and surges, you’ll have a guaranteed payout at the end.

PLEASE REMEMBER the FEES on this type of annuity are 3-5% and have market risk. Most of our clients do not buy this unless they are in their 30’s max 40’s and have 20 years before they retire.

Making the Move: The Right Types of Annuity For You

Not sure if an annuity is right for you? Or maybe you’re sure you want to invest, but you don’t know where to start or who to talk to?

That’s why we’re here. We make it easy to pick the investment plan that best fits your budget, goals, and future dreams.

Learn more about the services we provide, browse our blog for relevant topics, or leave a comment below and let’s start saving!

What Happens If I Die Before I Begin To Receive Payments From My Annuity?

What Happens If I Die Before I Begin To Receive Payments From My Annuity?

In the unfortunate event of the contract owner’s death before income payments begin, the beneficiary may receive a death benefit from the annuity.

In some contracts, the death benefit will be based on the account value. Other contracts use the surrender value or other applicable contract value to calculate the death benefit. What if you have a spouse? Does he or she have inherent rights? 

If your spouse is the surviving joint owner or sole beneficiary, then he/she may have the ownership rights with all rights and privileges of the original owner, as allowed by IRS regulations.

Two Distinct Phases of an Annuity

What Are the Two Phases of an Annuity?

The Accumulation (or Investment) Phase:

This is the phase in which you add money to the annuity and collect interest in some form. A purchased deferred annuity is necessary when this option is utilized. You can purchase one in one lump sum. You can make investments periodically over time.

The Distribution Phase:

This occurs when you begin distributions from the annuity. Two general options for receiving distributions are available.

The first option allows some or all of the money in the annuity to be withdrawn in a lump sum. The full contract value can be “rolled” into another agreement without paying taxes. This is called a 1035 exchange. The second option while using an income rider is to turn on the income rider. A lot advisors positioned variable annuities win the past with very expensive riders (3-4%). Their clients have never turned on the rider.

If you have an income rider and you have either not turned it on or  just turned it on, you should have it reviewed as soon as possible. Most of the time you can LOWER your fees from 3-4% to 1% and get 10-30% more income! Contact me for more information. I’m here to help you. 

What Is A Surrender Charge?

What is a Surrender Charge?

Annuities: Withdrawals At no Charge

A deferred annuity may be surrendered to receive a lump-sum payment of the account’s value. Most annuities have a surrender period that allows withdrawal at no charge. Withdrawals during the surrender period (meaning during the contract term, remember only allow this to be a MAX of 10 YEARS!) are usually subject to charges based on several factors including the account value and the number of years remaining. DO NOT accept any surrender charges over 10%. If you have any questions please contact us. Some products will have 14% or 20% surrender changes. Insurance companies should not sell these!

Surrender-Charge Free Withdrawal Options

Annuities are long-term instruments designed to accumulate money for retirement. Consequently, they provide the best possible benefit if left intact. Many of our products provide a number of options to withdraw because you should have options. Hence, options include 10% penalty-free withdrawals. Most noteworthy, they include interest withdrawals through the easy systematic payment program. Certain products withdrawals prior to age 59½ may be subject to restrictions and a 10% tax penalty. This is because of IRS regulations. These options vary by annuity, yet may include:

  • 10 % annual withdrawals.
  • 5% annual withdrawals Waivers for certain medical conditions
  • IRS required minimum distributions (RMD freindly) 
  • Substantially equal periodic payments

Are There Any Fees For My Fixed Annuity?

What Are The Charges For A Fixed Annuity?

Most annuities do not charge up-front sales charges, rather they have charges for withdrawals before the end of a stated period. A fixed and fixed-indexed annuity do not have administrative fees, although interest crediting rates take into account expenses related to the product. 

Variable Annuities

Variable annuities may involve ongoing maintenance and administrative fees to provide guaranteed death benefits and cover expenses related to the product. When purchasing a variable annuity, information regarding contract charges in the contract’s prospectus is available.

All this means is that with an index or fixed annuity there are no fees. Therefore, if you buy from the right insurance carriers, you’ll have little if any fees. Say you invested $100,000 into a fixed or index agreement and made no money. As a result, at the end of the term, you would therefore still get your $100,000 back. Some index annuities have a guaranteed minimum amount of a return, sometime this is as much as 1% simple interest.

In conclusion, say you purchased an index annuity with a 7 year term and it had a minimum of 1% simple interest. You made no money in the contract because the S&P 500 was down 7 years in a row. They would have to give you $107,000 at the end of the term.

Access to Funds: What if I need to access my money during the accumulation phase?

Access to Your Money

What if I need to access my money during the accumulation phase? Annuities are designed to accumulate money for retirement. Hence, they provide their best possible benefit if left intact. This is without taking out any withdrawals. Some of our products offer withdrawal options in your annuity that include 10% penalty-free withdrawals. and first-year credited interest withdrawals. Be careful here, some annuities only allow 5% or interest only so please make sure you understand what options you have before you purchase an index or fixed annuity. 

Withdrawals may be subject to early withdrawal charges and taxes. Meaning, if you take over the allowed amount of (5-10%) you will have to pay surrender charges and you will always have to pay taxes on any profits you made. 

How Do I Know If An Insurance Company Is Creditable?

What To Look For In A Fixed Annuity When It Comes To Ratings

insurance trust

How do I know the insurance company is creditable?

There are about 50 insurance carriers, but ONLY 12 investable. If an AM Best Rating is below an A-, it would be advisable to disregard any investment or long term relationship with them. 

Here are two rating companies to research when you are trying to find the best annuities to purchase.

A.M. Best

Founded in 1899, A.M. Best Company is a full-service credit rating organization dedicated to serving the insurance industry.  Contract owners refer to Best’s ratings and analysis as a means of assessing the financial strength and creditworthiness of risk-bearing entities and investment vehicles. 

ONLY WORK WITH CARRIERS THAT ARE A- or HIGHER

What is the Comdex Ranking of your insurance company?

AM Best, Fitch, Moody’s and S&P. The Comdex is not in reality a rating but rather a ranking based on the average of all the different ratings these different organizations give an insurance company. The Comdex rating is on a number scale of 1 to 100with a higher number being the better ranking. A good rule of thumb is 80% or higher.