What Happens to an Annuity if the Stock Market Crashes?
Hi there, Stan The Annuity Man, America's annuity agent, licensed in all 50 states. I'm so glad that you joined me for this blog. This is another one of those blogs that you put in the questions under one of our videos from the Stan The Annuity Man YouTube Channel. You can put in questions, submit a question or comment. And sometimes I look at that and go, "That's fantastic. That's a great question. And I'm going to put it in a blog for infinitely evergreen content, so this person and their question will live in infamy for the rest of time as the Stan The Annuity Man blogs grows and grows and grows and grows to infinite levels and popularity.
The person who submitted the question is Nikki Name, and I love that name. Nikki Name. I want to change my name to Nikki Name, that's awesome. The question is, what happens to an annuity if the stock market crashes? Nikki had a lot more questions about that, and following up, I answered all of them. I'm going to answer them again in this blog, and I can only imagine how excited you are to hear the questions and the answers.
So, are Fixed Index Annuities good against a stock market crash? What if the insurance company backing it goes under? What's your protection? Let's take them one at a time.
Fixed Index Annuities
FIA's, Fixed Indexed Annuities are CD products. They were introduced in 1995 to protect you and your principal from market loss. So, the answer is yes, it's a Fixed Annuity. It's not a security, a market-type product, or a market return product, regardless of what you hear out there. Fixed Index Annuities are CD-type products with normal CD returns. They do protect your principal if you attach an Income Rider to it. If you do that, there are fees for the Income Rider. But you won't lose any money if the market goes into the toilet. And that is a good thing for Indexed Annuities.
The second question, what happens if the insurance company backing that Index Annuity goes under? It'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. The annuity company, each state for Fixed Annuities, in this case, Fixed Index Annuities, falls under that Fixed Annuity category. There's a state guaranty fund that backs up the policy to a specific dollar amount, and every states different. The site is www.NOLHGA.com. You can pull it up and look at your state's coverage limits.
I encourage you not to put a lot of weight on that. What I want you to do is understand that when you bind an annuity of any type, you can't say, "I hate all annuities." No, there are many types of annuities. They all do different things and have different benefit propositions, limitations, etc. But base your decision on the Claims-Paying Ability of the carrier, period.
Annuity Companies Aren't Smarter Than Banks
Now, annuity companies aren't smarter than banks. They're more regulated than the banks, in my opinion. With Fixed Annuities, they have to keep a hundred percent of your money on hand, day one, liquid and investment grade bonds. 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 major rating services: Standard and Poor's, Moody's, A.M. Best, and Fitch. We also have a COMDEX score that's not perfect, but it is also a way to track the stability and financial security of the company issuing the policy. Because you buy an annuity for what it will do, not what it might do. The will do is the contractual guarantees. You'll get a contract in the mail; it's called a policy, but it's a contract. You buy it for the contractual guarantees and ensure 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, solvency ratios, etc. And I'll tell you if you don't need to be there with that company. You can contact me by easily scheduling a call.
The other thing you should keep in mind from a safety standpoint is that the annuity industry does an excellent job 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. And the annuity industry knows they cannot have the consumer lose confidence in these transfer risk contractual guarantees. We see a lot of consolidation in the annuity industry, but the bottom line is I will work with you to ensure we're choosing the right company. I represent pretty much every carrier out there, all the ones you've heard of and all the ones you haven't. So, that's the answer to that question.
Protect the Money
Okay, here are a couple more excellent questions from Nikki Name. Here's one of them. What if you don't care or want an Income Rider attached but wish to protect the money against market crashes? Then, an Index Annuity could work. Also, a Multi-Year Guarantee Annuity, a Fixed Rate Annuity would also work. Both MYGAs, Multi-Year Guarantee Annuity, and FIA, Fixed Index Annuities, are Fixed Annuities and protect from market crashes.
The other question that Nikki had was asking about the liquidity of an Indexed Annuity. Most Index Annuities, the vast majority, allow you to take out 10% penalty free annually. They're not all like that, but the vast majority are like that. Meaning that if you put a hundred thousand dollars 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.
All right, so Nikki's questions were excellent. But I took a little bit of extra time because I care. I care about you guys out there, and I want to make sure that you understand this annuity world because it's convoluted, and there are a lot of salespeople out there. I call them shucksters, but they're shysters and hucksters. And a shuckster, by the way, is someone who shucks oysters at an oyster bar. Just in case you want to write that down. But here are the questions that I came up with. Are annuities safe in a market crash? And does the stock market affect my annuity?
Yes, Index Annuities, which is what Nikki's talking about, are safe from a market crash. They're Fixed Annuities. They're not securities but Fixed Annuities issued at the state level. And the second question, does the stock market affect Index Annuities? On the downside, no, you're not going to lose any money. But remember the Index Option side, now this is the part that the salespeople out there push the truth a little bit too far. Remember that Fixed Index Annuities were designed in 1995 to compete with normal CD rates. It's not a market product. And if you bought one and think it is, it's not. It's a principal protection product that you're going to get a normal CD-type return.
So, Nikki Name, home run. If you're a baseball player, I'm telling you right now, those were good questions. I appreciate you putting them in the comments on our YouTube Channel.
Hey, thanks for joining me on the Stan The Annuity Man blog, and I will see you next time.
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.