One of the primary reasons that clients consider purchasing fixed or fixed indexed annuities is to protect their retirement savings dollars from loss. Since safety is a priority when considering an annuity purchase, it is unsurprising that clients often worry about the failure of the issuing insurance carrier. They will often express this objection by saying, “I just don’t trust it — it’s not FDIC-insured!”
This is a reasonable concern given the events of the past few years. Lehman Brothers and Bear Stearns were both highly respected companies when they suddenly went out of business. A large money market fund, the Reserve Primary Fund, dropped its share price below the near-sacred $1 mark, causing the federal government to create a temporary program that guaranteed money market mutual funds in order to restore investor confidence. And we can’t ignore the fact that some very financially sophisticated clients thought for a long time that their money was safe with Bernie Madoff.
How do we put our clients’ fears to rest? Our first instinct may be to inform our clients of the protections that their state’s guaranty fund provides — but unfortunately, nearly every state carries some prohibition on the mention of these guaranty funds during the sales process.
So what other ways can we address this objection? Here are four ideas.
#1; Carrier strength
Ask your client, “Even with the FDIC insurance, would you put money in a bank that you thought was in bad financial shape?” The answer will likely be, “Of course not!” So, the strength of the issuing insurance company is a factor in the decision process.
You can share with your client information about the financial strength of the carrier. Many carriers publish financial information, and independent rating agencies examine and assign financial strength ratings to annuity carriers. Also, stock analysts regularly publish reports on the future earnings prospects of publicly traded carriers.
If you can show your clients evidence of the carrier’s financial strength, stability, and outlook, you will be able to begin addressing this objection.
#2: Written guarantee
Ask your client, “In the case of Bernie Madoff, Lehman Brothers, Bear Stearns, the Reserve Primary Fund, or whatever other situation you are thinking of, was there a written contractual guarantee of safety?” The answer is “no.”
Even money market mutual funds, which have historically maintained a steady share price of $1, do not contractually guarantee the safety of client money. A money market fund prospectus will typically include the statement, “Although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund.”
Fixed and fixed indexed annuities, on the other hand, do include written, verifiable, and enforceable guarantees. This is what sets annuities apart from the situations mentioned above.
#3: General asset backing
Ask your client, “Would you feel protected if the carrier was required to back your annuity with all of its assets?” The good news is that with a fixed or fixed indexed annuity, that’s exactly what you get.
The carrier is required by law to hold reserves and some excess capital. State insurance departments will verify that the reserves are calculated correctly and that the assets backing the annuities are appropriate and actually exist. And, the carrier must back the annuities it issues with all of its general assets.
#4: A balanced approach
The three of the previous points will help bolster the client’s view of an annuity’s safety, but we still haven’t directly addressed the lack of FDIC insurance. The way you do that is with a story.
Suppose that you once knew a homeowner who was so concerned about the possibility of burglary that he installed reinforced doors and a monitored security system and bought an aggressive dog. His house was never broken into, but it did collapse because of termite damage. You see, he was so vigilant against one risk that he ignored another very significant risk.
Putting long-term retirement savings in the bank is very similar. The risk you’re ignoring, like termite damage, is subtle and easy to put aside in the short run, yet devastating in the long run. That risk is inflation. Even in the bank, if the after-tax interest rate fails to keep pace with inflation, you have lost purchasing power, which is very similar to losing money.
Just as you would advise the homeowner to worry a little less about security and a little more about termite control, it makes sense to take a balanced approach with your retirement savings. Putting money into a strong carrier that provides a written guarantee and backs the annuity with all of its assets, along with obtaining an attractive interest rate on the annuity issued by that carrier, is a balanced approach to maintaining and growing the purchasing power of your money.
And that’s true safety.
Chris Conklin is a licensed agent and principal and actuary of Insurance Insight Group and MyAnnuityTraining.com. He can be reached at 801-290-3320 or [email protected].