Getting a good rate is the most important incentive for many investors in fixed annuities when shopping for a new contract. For others, safety of their principal is paramount. Therefore, the ratings that are given to a particular fixed annuities company can be an important factor in determining which insurer to put your money with. As with many economic opportunities, the higher the safety rating, the lower the rate will be on the contract, and vice-versa. But annuity company safety ratings can be an imperfect barometer of a company's stability as they are not constant. There have been failures of once highly rated insurers that eventually fell into bankruptcy and liquidation (for example, First Capital and Executive Life). However, no holder of fixed annuities lost any funds and we will see why.
The state guaranty laws effectively prevented most of the contract holders of fixed annuities with those companies from losing their money. Although the laws differ by state, these laws typically dictate that fixed annuities are covered for up to $100,000 per separate owner per carrier. Because these laws allow for separate protection for each different owner, it is possible for a single owner to shelter several fixed annuities contracts with the same company, under the state umbrella, simply by titling each contract differently. For example, a married couple could easily shelter $600,000 in fixed annuities with six $100,000 uniquely titled contracts. They could each have a $100,000 contract in each of their names, plus one with joint ownership, one owned by a trust, and two IRA contracts. Each contract will be covered separately under the guaranty laws.
Furthermore, the coverage provided by these laws effectively also carries benefits for investors seeking higher annuity rates. They can now consider companies with lower safety ratings, as the possibility of losing their money due to insolvency has been effectively negated by the state. Oddly enough, you may not have heard about state guaranty laws from your insurance agent or broker, because the states will not allow the existence of the guaranty fund be held out and used as a possible inducement to get clients to invest. However, if you ask your agent about it, he or she has a fiduciary duty to explain it to you.
As to ratings of insurance companies, five independent agencies — A.M. Best, Fitch, Moody's, Standard & Poor's, and Weiss — rate the financial strength of annuity companies. Each has its own rating scale, its own rating standards, its own population of rated companies, and its own distribution of companies across its scale. The ratings can be classified into 'secure' and 'vulnerable' mega-categories, and you can see more detail about the ratings and the number of companies that fall into each category at this public website: http://www.iii.org/individuals/life/buying/strength/.
Whether you are seeking higher rates from fixed annuities or greater safety in your fixed annuities investments, you may be able to get both.
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