What Happens to an Annuity if the Stock Market Crashes?
The question is, what happens to an annuity if the stock market crashes? Are fixed index annuities good against a stock market crash? What if the insurance company backing it goes under? What's your protection? So let's take them one at a time.
Fixed Index Annuities
FIA is fixed index annuities or CD products. They were introduced in 1995 to protect you, to protect your principal from any market loss. So the answer is, yes, it's a fixed annuity. It's not security. It's not a market-type product. It's not a market return product, regardless of what you hear out there. Fixed index annuities are CD-type products, with expected CD returns. So they do protect your principle. If you attach an income rider to it, then there are fees for the income rider. If it went way down, you're not going to lose any money, and that is a good thing for index annuities.
The second question is, what happens to the insurance company backing that index annuity if it goes under? That's a good question. Now with CDs and things like that, you're backed by FDIC insurance. It's the best coverage you can get. The annuity industry has nothing to compare to that. Let's be very clear. There’s a state guarantee fund that backs up the policy to a specific dollar amount and every state is different. The site is N-O-L-H-G-A, nolhga.com. You can pull it up and look at your state's coverage limits, but I encourage you not to put a lot of weight on that. I want you to understand that when you buy an annuity of any type, you just can't say, I hate all annuities.
There are many types of annuities. They all do different things. They all have different benefit propositions and limitations, etc. But base your decision on the claims-paying ability of the carrier, period. Now, annuity companies aren't more intelligent than banks. They're more regulated in the banks, in my opinion. They have to keep 100% of their money on hand day one liquid in investment-grade bonds with fixed annuities. You can go down the rabbit hole if you want to argue about investment-grade bonds, but that's as good as it gets. So look at the claims-paying ability of the carrier. There are four primary rating services, Standard and Poor's, Moody's, AM Best, and Fitch. We also have a COMDEX score that's not perfect. Still, it is also a way for us to track the stability and financial security of that company issuing the policy because you buy an annuity for what it will do, not what it might do®.
Make sure you focus on the contractual guarantees. You're going to get a contract in the mail. It's called a policy, but it's a contract. So you buy it for what it will no, not what it might do, and you make sure that that company can back up the claims. I can do that for you. I can help with that recommendation. With my background with Dean Witter, Paine Webber, Morgan Stanley, and UBS, I know how to look at bond holdings, insolvency ratios, and all that stuff, and I'll tell you if you don't need to be there with that company.
The other thing you have to keep in mind from a safety standpoint is that the annuity industry does an excellent job, in my opinion, of self-regulating. I call it the annuity mafia, but the big guys oversee the little guys because, remember, annuities, regardless of the type, are confidence products.The annuity industry knows that consumers cannot lose confidence in these transfer-risk contractual guarantees.
Moving on, what if you don't care or want an income rider attached but just want to protect the money against market crashes? Then an index annuity, a multi-year guarantee annuity, and a fixed rate annuity would work. Those MYGAs, multi-year guarantee annuities, and FIA, fixed index annuities, are fixed annuities and are protected from market crashes. Now, about the liquidity of an index annuity. Most index annuities, the vast majority allow you to take out 10% penalty-free annually. The vast majority are like that. Meaning that if you put $100,000 in, and you said, "Okay Stan, I'm in month 12 or whatever, how much money can I get out penalty-free?" It'd be 10% of whatever that accumulation value would be. Remember with the index annuities, if you have an income rider the liquidity is based upon the index option side, and you typically can take out 10% penalty-free.
So are annuities safe in a market crash, and does the stock market affect my annuity? Yes, index annuities are safe from a market crash. They're fixed annuities. They're not securities and not a market product. If you bought one and you think it is, it's not.
Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.