A spike in annuity sales from the fourth and final quarter of 2020 suggests that there is an increasing trend of investors looking for safer investment alternatives to high-risk stocks, bonds, and mutual funds. Overall annuity sales were up 2% compared to the final quarter of 2019, with certain principal protecting annuities like fixed deferred vehicles skyrocketing 41% in the fourth quarter of 2020 — 8% for the entire year. Companies like American Equity witnessed steady growth in their financially secured instruments, increasing sales of fixed index annuities by 23% at the end of 2020 compared to the final quarter of 2019. One potential explanation for the increase in annuity sales is the safety of the financial life insurance industry and the benefits of guaranteed principal protection, especially for investors who are looking for avenues to secure their retirement funds.
The financial life insurance industry is highly regulated by each individual state throughout the country, as opposed to securities investments, which are governed and regulated by the federal government. Each state elects or appoints an insurance commissioner who is in charge of overseeing the insurance companies in their respective state. If an insurance company fails or cannot meet their financial obligations to policyholders, state guaranty associations step in to protect the invested assets of the policyholders by taking over the insolvent insurance company in a process called receivership. Prior to liquidating the insurance company’s assets, the state insurance commissioner may attempt to revitalize the failing insurer, this is known as rehabilitation. During this process, policyholder’s accounts are kept whole and secure in their investments, which is a stark contrast to Wall Street when the market crashes or a stock loses value.
While investors may be limited in their ability to add or subtract funds from their annuities when an insurance company falls into rehabilitation, they can rest assured that their money is safe. Their assets will be protected up to the state guaranty association’s protection cap, similar to how the Federal Deposit Insurance Corporation (FDIC) insures up to a certain amount of funds invested in a bank. Each state’s guaranty association determines what level of benefits will be protected in the event of an insurer falling into receivership.
Should the state commissioner determine that the failing insurance company cannot be rehabilitated, the company would be declared insolvent, and the assets of the company liquidated. This triggers the state guaranty associations to kick in and provide continued benefits to policyholders until their assets can be successfully transferred to a solvent insurer. In the event of a multi-state insolvency process, the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) will coordinate with the participating state commissioners to facilitate the multi-state liquidation process.
Overall, the role of the state insurance commissioner, the state’s guaranty associations, and the NOLHGA is to protect consumers. They do this by ensuring that policyholders continue to receive their policy benefits when an insurance company becomes financially unstable, and to successfully transfer liquidated assets to solvent insurers so that the consumer can continue receiving their invested benefits without hesitation or delay. Unlike the securities industry where investors risk losing all their principal, the financial life insurance industry actively looks to protect their consumers even when there is an issue of insolvency, or failure to meet certain financial obligations to policyholders.
The level of protection and care for the consumer in the financial life insurance industry is unequivocally unmatched and lends reason to why safe annuities — financial life insurance investments — are gaining more attention in the overarching financial industry. It is important for investors to remember that although annuities come from the financial life insurance industry, not all annuities are principal protecting vehicles that guarantee security during a catastrophic economic event, such as a stock market crash. Variable annuities, for example, are insurance products that also happen to be high-risk securities. They are tied to mutual fund portfolios that can leave an investor’s money at risk of losing principal. Furthermore, these vehicles come with costly brokerage fees that erode the value of the investment over time, even more so during down market trends. As a result of their ties to the stock market, these vehicles are regulated by the Securities and Exchange Commission (SEC) and not recommended for retirement planning.
Safer instruments in the financial life insurance industry, like fixed and fixed index annuities, are recommended for retirement planning because they protect investor’s principal. Not only do the vehicles themselves protect the consumer, but they are backed by an industry that has an immense state-by-state safety net that ensures the financial peace of mind of the annuitant policyholders. As a result, these investments are sometimes referred to as Crash Proof Vehicles™ by licensed retirement phase experts in the industry. The reason for this designation is due to the fact that these vehicles are insulated from the volatility of Wall Street and have survived every major stock market crash since the creation of the life insurance industry during the 18th century.
Furthermore, the financial life insurance industry witnessed another major economic event in 2020, surviving the pandemic-induced stock market crash while keeping investors safe, as opposed to individuals who lost significant portions of their retirement nest egg; upwards of 30% at the peak of the market crash. Many investors learned that there is not a safety net for security investments, and in response, protected portions of their assets with Crash Proof® alternatives. These vehicles have security, income guarantees, and are backed by an industry that has the consumer’s well-being in mind to ensure their retirement investments are on solid ground.
The protection of assets is one potential explanation for the increase in annuity sales at the end of the 2020 calendar year. Eliminating market risk and costly fees can expand retirement investing and the spike in sales indicates a shared sentiment among investors to secure their nest egg and have opportunities for growth. The benefits of the financial life insurance industry extend beyond the principal protecting Crash Proof Vehicles™ that are available for investors, and spans across the entire industry which has never gone bankrupt or left consumers at risk. Compared to the stock market, the financial life insurance industry is set up in the best interest of their consumers, whereas the stock market is constructed for the brokers, the money managers, the hedge funds, and more — anything but the individual investors. In the end, when planning for retirement, investors can choose a financial industry riddled with volatility, risk, and corruption, or a financial path of security in an industry with safety nets and guarantees.
