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John Lenz: The Banking Crisis & Annuities

Stan Haithcock
March 28, 2023
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About Fun With Annuities Episode #142

Unless you have been living in a cave, there has been a little banking crisis recently that continues to concern anyone that’s not buying the media or political spin. So, of course Stan The Annuity Man has to give you the absolute facts and bring in an objective expert that would provide the brutal truth. John Lenz is just that person. The “annuity architect” himself agreed to help me hammer this important topic.

Without mentioning specific banking or annuity company names, John and I started in on what actually happened with the banks. So let me tell you a little story to set the stage for the podcast.

There was a little pandemic you may remember called COVID-19. Our government decided to print more money to pay people not to work. This predictably created runaway inflation a few years later. So, to try and tame inflation, the FED starts aggressively raising interest rates. Because bond valuations go down when rates go up, the bonds being held by the banks lost a ton of value, and the banks had to sell them due to current rules in place involving liquidity and solvency. We now live in a digital and social media world, so word spread quickly, and consumer panic set in. In addition, confidence was lost with smaller and regional banks, and money started moving to larger banks. The saga continues, but that’s the foundation.

From this little factual nugget, John and I covered the current state of affairs with the banks and that the U.S. seems to be operating in a “too big to fail” strategy. That is a big mistake, as we all know. We talked about risk-based capital and how regulators are in place to oversee that money, and dug in from there.

John did an excellent job explaining how the life insurance and annuity industry oversees risk. I always say that the annuity industry is not smarter than the banking industry, it’s just more regulated. It’s more hand-cuffed not to do stupid things. In my opinion, it’s set up better, and it’s more pro-consumer. So, John covered in detail annuity company reserves, capital requirements, and the surplus that protects your money when you buy an annuity.

I had John also walk us through what happens when you buy a specific type of fixed annuity. What does the life insurance carrier that issues your annuity do to protect your money? He fully covers that answer. I also pushed him to simplify the explanations of how insurance companies do regular stress tests and how they make assumptions of lapse, death, withdrawals, annuitization, interest rate increases, and potential default of investments. The bottom line is that these processes are thorough and ongoing.

We also talked about State Guaranty Funds and the National Association of Insurance Commissioners (NAIC), that’s in charge of making sure life insurance/annuity companies are safe and compliant.

I’m not saying that you need to listen to this podcast. I’m yelling at you that you must listen. This should be required listening for both consumers and anyone in the annuity industry. I know that you will enjoy it. I sure did.

In this episode, The Annuity Man and John Lenz discuss:

  • Required capital level of annuity companies
  • Market value adjustment, surrender penalty, and pivoting with annuities
  • What state-guaranteed funds are for
  • Exposure and liabilities in the insurance industry

Key Takeaways:

  • When the annuity company invests their client’s money, they make sure to add capital over and above the asset to provide a safety net. That’s called a required capital level; insurance companies add multiples of that.
  • The market value adjustment and the surrender penalty help protect the insurance company and its policyholders. However, you could buy an annuity without market value adjustment and guarantees a full refund.
  • State guaranteed fund was an attempt by the insurance industry to create another additional layer of security for the policyholder. In an unusually catastrophic event where all redundancies had been found insufficient, the state insurance commissioner can order the company to be rehabilitated and strengthened.
  • Reinsurance is complicated; an insurance company will take part of their liabilities and transfer those to another company. Most importantly, the company that issues the policy is still on a hook even if they reinsure.

"There are layers of redundancy to try to keep insurance companies healthy, and it really works." — John Lenz

Connect with John Lenz:

Website: Lenz Financial Group

Fun With Annuities Podcast is hosted by America’s Annuity Agent®, Stan Haithcock, The Annuity Man®. Hear brutal annuity facts with no sales pitches from the top independent agent in the country, licensed in all 50 states. Author of 7 books, Stan dives deep on all annuity types and strategies. It’s fun, learning the contractual truths on how annuities actually work and if they’ll fit your personal retirement lifestyle.

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