What exactly is annuity safety and how do you measure it? Annuities are of different sorts and hence it may be difficult to give you a single common annuities definition for safety. The very least we can do to achieve quality is to find out what the synonyms tend to be for the different types of annuities and relate how safety applies as we define annuity safety in each instance.
It is anticipated that retirees would desire to add to their income beyond social security and pension income. Using annuities, they can commit investment dollars to yield a consistent income. As you know from previous annuity explanations, annuities, being an insurance product, can provide an ongoing income for life. But retirees who are within their autumn years must think about how safe annuities are and how dependable that income stream will be.
Any discussion of annuity safety would be lacking without ratings of annuities explained. Annuity companies are rated by third party rating agencies such as AM Best, Standard and Poors, and most conservatively, by Weiss ratings. Ask the annuity company or its agent for this printed or on-line rating information. If you stick with companies in the highest 2 categories, the annuity is safe. If you want more data, get the balance sheet of the annuity company and see how they have their funds invested. You want to see most of it in high quality bonds (AAA, AA) and low percentages of mortgages or other assets.
Income aspects of annuities explained
Retirees might either favor an annuity in which entails monthly or quarterly payments. The second option may be identified as a form of insurance against lack of income whenever they live too long. The annuity classification, that of a deferred annuity, is one which a premium pays and payments are deferred until some future time. The negative aspect is the fact that lifetime annuities may leave nothing at all for the beneficiaries.
Safety of Fixed vs. Variable Annuities Explained
We have regarded two annuities so far, pertaining to immediate and deferred annuities. However, either of these could be of two types: fixed annuities or perhaps variable annuities. Fixed annuities means that the insurance company warrants to return your original deposit amount on which it pays you interest every year. To help them provide you a constant income, these legal agreements depend on long-term interest obligations from top class bond investments.
The greatest benefit of a fixed annuities is you can opt for a guaranteed life time income. But you need to understand that if you live 2 decades or more, even marginal inflation rates may substantially devalue that purchasing power of that income.
As to variable annuities, the payouts can be impacted by market fluctuations and this means your current principal amount will vary according to market volatility. So the safety of your principal or your income stream is NOT dependent on the insurance company because they act merely as a conduit for your investment selections. Your money is not invested In the insurance company, but merely through it into the investment sub-accounts you choose.
Variable annuities can also provide you a lifelong income -- but that income will not be a constant amount. The simple reason is because the sub-accounts are like mutual funds and financed by variable accounts whose values regularly fluctuate. To summarize variable annuities as explained: an immediate or deferred arrangements with the end value of payments which can be variable, depending on the investment selections made.