The Current Financial Crisis and How Annuities Are Affected
By Bill Broich
Mortgages provided for non-qualified applicants and runaway property values. The assumption was that real estate would continue to rise and equity would be gained in home ownership. Once the melt down started, many people were left with homes that they could not afford (and never should have qualified for) and simply went into default. Once default came, the holders of the mortgages asked the sellers of the mortgages to provide relief with the promises of insurance against loss. As things worsened, the funds and collateral were not sufficient to survive and the overall mortgage paper had to be written down (lowered in value). Once the devaluation of the paper happened, banks were left short of reserves because of having to provide additional collateral for the reduction in value of the mortgage paper.
A vicious cycle occurred, homeowners were evicted, the values of the homes declined, the value of the mortgage paper declined, the banks had to find collateral to cover reserves. The insurance companies who insured the loans were short on collateral and all this created the failure of banks and the investment bankers who created the whole scheme.
Insurance companies have come into the fray because many of them had purchased (provided the money) to fund the mortgages. For the insurance company it seemed like a prudent move, insured mortgages. Insurance companies want a fair yield without exposure to loss and the mortgage being insured to them was an ideal offering. The problem was that the original mortgages were being written with almost no oversight and with a potential larger than expected default rate appearing, there just weren't enough assets to guarantee the loans. AIG is a fine company and their insurance and annuity divisions are the envy of the industry but their investment arm bought and sold these mortgages which created the whole collapse of the company and the eventual takeover by the US Government.
AIG and other insurance companies who sell and service annuities fall under the state guarantee fund of each individual state. If an annuity issued by AIG were to be questioned about it value and its security, the answer is "absolutely." All contracts issued by AIG (except variable) are fully insured to their states limits. In the real world for AIG, their insurance and annuity companies are well managed and have more than enough assets to maintain their commitment to their policy owners and it is extremely rare that any state guarantee fund would be called on the assist the company. This division of AIG will be purchased by another insurance company and business will continue just as before.
That site beauty of the annuity contract, guarantees and continuance is always guaranteed. Like the FDIC, the annuity contract is covered by insurance limits established by each state. These limits vary from $100,000 to $500,000 depending on the state of residence of the annuity owner.
Is there any reason for concern? I think that answer is yes...sort of. If the federal government does not get regulatory control over Wall Street and the way it creates products then the issue will continue to a concern. Management of insurance companies should be primarily left to each state department of insurance and never allowed to come under federal control. That is very obvious after this financial mess created by greed in the mortgage marketplace.
The current and future administrations have to get their act together and remember they are elected by the US taxpayer and they should make every effort to protect us and our futures on a greater level than a few Wall Street powers.
Income Planning, Retirement Planning and Annuity Solutions to Insure You Never Outlive Your Money
By Sandra Skidmore
Some Annuity Owners are positioned to lose a significant portion of their annuity's value to taxes, and most are not even aware of the problem.
The IRS is not required to notify annuity owners about an exemption to the tax code that could save thousands of dollars in income and estate taxes. Below are 10 tips to keep from making huge mistakes.
1. Clearly Define your needs before making your purchase. There are a number of different kinds of annuities available, and each has its own unique features, capabilities and benefits.
2. Have a good grasp of the premium bonuses offered on annuity products. A premium bonus is simply additional interest automatically credited to your annuity's value.
3. Pay attention to the renewal rate offered by your annuity. Following the first year rate, the rate thereafter (known as the renewal rate) may be considerably lower.
4. Avoid tax penalties when exchanging one annuity for another. The 1035 exchange refers to the section of tax code that allows individuals the flexibility to exchange one annuity for another without incurring any immediate tax liabilities.
5. Designating a trust as the owner of your annuity may not be the best solution. It may greatly limit the options and flexibility.
6. Understand the options your beneficiaries have for settlement. A forced income payout plan may provide a legacy that is stretched out over a period of time which may fall closer in line with the wishes of some individuals leaving money behind for children or grandchildren.
7. Stay up to date with all beneficiary designations. One of the more common and costly mistakes made by annuity owners is the failure to update their beneficiary information.
8. Be informed before naming minors as the beneficiaries of your annuity. In many cases, state laws can tie up the proceeds of an annuity if a minor is named as the beneficiary.
9. Annuitization may not be your only option - explore the possibilities. Some newer annuities offer options which allow you to set up a schedule of income that can be adjusted along the way.
10. Be sure to take the minimum distributions required by the Internal Revenue Service. Required Minimum Distributions are the distributions, defined by the Internal Revenue Service, that you must start taking annually from qualified retirement accounts by April 1st of the year following the year you turn age 70 1/2.
For more information on the different types of annuity products available to you, contact the author below.
Author- Sandra Skidmore Retirement Planning Solutions is a Kentucky based company also licensed in IN, OH, VA, and TN.
Where Does Safety Come From?
By Robert Zimmerman
At a time when the entire world is suffering from financial shell shock, there comes a report from a major financial Wall Street firm calling into question the financial integrity of annuities and insurance companies in general.
To reinforce this report, a popular television program comes forth with the question of how anyone can put their money into an annuity contract. (Talk about shouting FIRE in a theater!) This simply reinforces the popular 'correct' thinking among financial gurus that annuities are suitable only for the financial neophytes of the world.
Like all the so called gurus that have no use for annuity contracts, there is no effort to distinguish between fixed and variable annuities, and never a mention is made of the existence of guaranty funds in every state that function as a backstop for your account if you insurance company fails. One has to wonder if this failure is due to ignorance, or if there is a bias against the very idea of using insurance contracts as part of the financial planning process
The effect on the everyday investor was made apparent recently by a comment regarding AIG heard at a recent public presentation by one of the attendees. The observation was that since AIG was in financial difficulty, ALL insurance contracts are in doubt. The AIG situation is a perfect opportunity for all those who distrust insurance companies to say 'I told you so'.
And yet, for those who look into the AIG mess, it will be found that the insurance companies it owns are all paying their obligations and will continue to do so.
Without a doubt, the insurance industry is affected by the same financial storm that affects the rest of the banking and investment industry. And, it is reasonable to ask any company how their particular financial structure has been impacted. It is important to recognize that the safety of your 'fixed' annuity or life insurance policy is directly related to the financial integrity of that companies investment. You can ask them to provide a full display of their holdings if you are seriously interested in doing your own financial evaluation. Or, you can simply rely on one of the ratings agencies to give you their assessments.
Any representative of the company you might consider dealing with would gladly provide you with the financial statements of the company he represents. He certainly does not wish to be involved with a company that may jeopardize your nest egg, if for no other reason that he does not wish to betray your trust or need to explain why your contract is being taken over by a stronger company.
So the question of the safety of your fixed annuity or life insurance policy is rather easily determined. That is not the case for 'variable' annuities, however. The funds in these contracts are typically invested in assorted stock market accounts, varying in their risk orientation from very conservative to very aggressive. The safety of your money is directly related to these underlying investments. You account falls in value when the market falls. This is no different from the mutual funds you hold.
What makes annuities different is that you have contractual provisions available to insulate you from stock market declines. Most contracts issued automatically include a provision to guarantee your principal if you die, so that you heirs will not suffer a loss if the market declines. In recent years however, it has been possible to purchase additional protection with these contracts that guarantee your principal to you as a living person. And to carry this idea even further, you can actually have your account enjoy an increase in value so that when you go to access it for income, the value is guaranteed to increase even if the stock market did not.
Are these guarantees free? No. They are the reason for all those extra charges you can load into a variable annuity which have led to so much criticism from the 'experts'. Now, the question is being raised by the same 'experts' as to whether the insurance company charged enough money. Perhaps, it was 'too good a deal for the customer? Several companies have have witnessed a substantial decline in the value of their stock as a result of this concern.
Let us assume it was too good a deal for a moment, and that the insurance company standing behind it does not live up to its end of the deal. What does that do to the underlying investment accounts? They are still there, are they not? You still own them, the same as if you have gone out to purchase them as mutual funds. Other than losses imposed by the securities markets, the only loss you have is whatever amount you gave to the insurance company for the added guarantees that they promised.
The ultimate source of safety for your investment holdings is diversification. Never put all your eggs in one basket. That is one of the benefits of using mutual funds as opposed to investing in the fortunes of individual companies. Using a variable annuity allows you to allocate investments among a wide range of risk, and to change the allocation at any time. You can even instruct the company to re-balance your risk distribution on a regular basis. AND, since this is done in a tax sheltered environment, you need have no tax reporting to be done on the changes.
The advantages offered by these accounts is becoming more widely recognized even by some of the experts. When you hear an attack on them from any source, you are well advised to simply ask this question: How safe is your recommendation?
Like it or not, we all must be financial planners. Bob Zimmerman now brings over 50 years of experience to the aid of those seeking to better inform themselves. Holding a BS degree in Finance from the University of Detroit, he also has an MBA degree from that institution.
He spends his senior years devoted to advancing the goal of educating the public.
A History of Annuities
By Steven Hart
Many people today make use of annuity as for retirement, but it is not a new instrument. Back during the time of the Roman Empire, citizens could obtain what was known as an annual stipend, or annua. In exchange for a one-time disbursement to the annua, the citizen would get a payment back every year for the rest of their lives. This practice continued to evolve over time.
By the 1600's, much of Europe was in the throws of near constant warfare; the Thirty Years' War would start between Protestants and Catholics in the Holy Roman Empire, and spread from there to gradually envelop most of the continent. City-states and nations were desperate for funds, and they used a form of annuity to raise money for defensive or offensive operations. They used what was known as a tontine, which means promise or pledge, as a fundraiser. Like the annua, people would contribute money to a general found, and in exchange they'd get a smaller sum back each year for a set number of years.
One of the first of these was the State Tontine of 1693, established in England. The process was simple: a person could buy a share in the Tontine, and then they would get an annual payment from the fund for the lifetime of a specific person. In the modern annuity, a person gets one for themselves, but these English Tontines were different. The person buying the share could designate a different person as what was known as the nominee for the Tontine. Normally, they would select a young child, hoping to make the lifespan of the annuity as long as possible. As the nominees passed away, the remaining ones would get a larger share of the annual payment; until the last one died. This eventually evolved into a system whereby the share owners could pass their share(s) on to a beneficiary in their will.
In the United States, the first annuities appeared in the mid 18th century. Initially, its function was to help Presbyterian ministers and their families. Like other annuities, the ministers put money in the fund, and could then receive lifetime payments. Eventually, in the early part of the 20th century, average citizens could buy annuities without having to be part of a group. They truly hit their stride in the 1930's, during the worst part of the Great Depression. People were suspicious of banks and stocks, yet still needed an income; during that era, more than ever! Insurance companies were seen as one of the few financial institutions that people could trust. In addition, the government, under President Roosevelt, had launched programs to encourage people to save. Annuities were seen as the perfect blending of both issues: they got people to save their money, and they were handled by insurance companies.
These annuities were quite simple: a promise to repay the principal, plus a fixed rate of return that built up over the accumulation period. You could get a set amount for the rest of your life, or specific payments for a set time. A key benefit to annuities was (and is) the fact their tax-deferment; taxes weren't paid until the money was withdrawn.
By the 1950's, the feature of variable annuities was introduced; the first mutual funds. Now, people could spread their money across several accounts, depending on the degree of risk they were willing to accept. Eventually, other features were added: bonus rates, reduced time until maturity, death benefits, and even checkbooks.
Today they remain an excellent means of investing for the future, and insuring that you'll have an income in your old age.
