Annuities- Friend or Foe

Financial magazines, newspapers, TV programs, and local communities have battered the reputation of a very strong and useful financial product, the annuity. In many cases, the most outspoken opponents of annuities are those who are not licensed to offer them or don’t really understand them.

Annuities have been the trusted retirement vehicle of choice for many wealthy and famous people. Ben Franklin left two annuities to his heirs and was a proponent of life insurance and annuities to provide income to widows and orphans. Babe Ruth invested in annuities and is quoted as saying, “I may take risks in life, but I will never risk my money, I use annuities and I never have to worry about my money.”

Fixed Annuities are retirement savings vehicles backed by the full faith and credit of issuing insurance companies. Many of these insurance companies have been around for over a hundred years and are considered to be the backbone of our financial system. They have survived the Great Depression, two world wars, and the Stock Market crashes of 1929 and 1987. This is because of their conservative and sound investment practices. They are highly regulated by the states in which they operate in order to protect the policy holders from loss.
The insurance companies reinvest the money that is deposited by the annuity holders much in the same way banks reinvest money that is deposited by CD holders.

When a Bank reinvests their CD purchasers’ money they lend it to consumers to buy homes, purchase cars, finance a business. The borrower pays the bank an interest rate, and the bank keeps a portion of the interest. The remainder of the interest is passed on to the CD holder.
Insurance companies also lend the money that is deposited in their policies. But unlike banks, they do not lend it to consumers to buy homes, or to purchase cars. Insurance companies consider this to be too risky for their taste. They lend money to the United States Government and Large Corporations by purchasing their debt (bonds). They receive an interest rate on their investments, keep a portion of the interest, and pass on the remainder to their policy holders.

Unless you have been living under a rock, you know all to well what happened to our economy over the past 18 months. Many retirement accounts have been devastated, and many retirement dreams have been shattered. Those who retired a year ago, or have been planning to retire soon may have to rethink their plans, retire on less income, or delay retirement altogether. That is unless they owned a fixed annuity. These policy holders have been unaffected by the erosion of the market.
While fixed annuities are not appropriate for all of a person’s money, they are a place for some of everyone’s retirement savings. Amazingly enough, the skeptics who once bashed fixed annuities now see their true value. “A” rated insurance companies are a strong, safe place to earn a competitive interest rate. Annuities are the only products that can guarantee an income for life. So you decide, are they a friend or a foe?