Chapter 2: Fixed Annuities

Introduction

If consumers like the basic idea of accumulating money for a lifetime income stream but do not want to risk taking a beating in financial markets, a fixed annuity might be the right product for them. Like everything else involving a financial investment, a fixed annuity has attractive and unattractive features. However we will begin our study of these contracts by focusing on their positive side and learn why these annuities, particularly when compared to their variable cousins, are attractive to many savers and some growth-minded investors.

Unlike variable annuities, fixed annuities put nearly all the risks involved with investing money on the insurance company�s shoulders and offer owners multiple guarantees. Arguably the most significant of these guarantees is a full return of the principal. Only premature surrender of the contract or an insurer�s insolvency can endanger this guarantee. Otherwise, even in terrible market conditions, the owner�s money will remain intact.

Fixed annuity contracts will also guarantee set amounts of interest that will be credited to the principal until annuitization. Generally, the insurer will designate a specific interest rate, known as the �initial rate,� that will be applied to the principal for a contractually mandated period of time. After anywhere between a few months and a few years, the insurer pulls back the initial rate and credits a new interest rate to the annuity. This new rate is usually modest and can change frequently during the accumulation period, but the contract for the fixed annuity guarantees that the new rate will never fall below a set percentage.

These guarantees help simplify the fixed annuity from both a producer�s and a prospective buyer�s point of view. The minimum guarantees keep fixed contracts from being deemed securities under federal rules and allow licensed insurance producers to sell these annuities without needing to become licensed as securities dealers. Sellers and marketers of variable annuities, on the other hand, cannot avoid this licensure requirement.

For the consumer, the guarantees mean that, barring premature withdrawals or surrender charges, a minimum return on a fixed annuity may be calculated down to the last penny and can greatly assist those annuitants who need to create a fixed budget for themselves. The fact that the insurance company remains responsible for investing the principal in its general account eliminates the need for clients to wade through confusing account prospectuses and to make extremely complex investment decisions. Also, because all clients� money goes into a general account, a fixed annuity will not feature the kinds of fees that can reduce the value of a variable annuity. The buyer is still compensating the insurer for administrative services, but costs for these services will rarely count as a direct charge that reduces one�s account balance. Instead, the various costs associated with fixed annuities will be reflected in the interest rates that insurers credit to accounts.

Initial Rates

The interest rates that insurance companies offer to owners of fixed annuities will depend on the company�s business goals and financial health, the amount of money invested in the annuity and the duration of the initial guarantee. Due to a lack of annual fees, fixed annuities will always have their credited interest rates affected by the insurer�s ideal �spread.� In an annuity context, a �spread� is the difference between the amount of interest the insurer earns through its investments and the amount of interest the company applies to clients� principal.

Years ago, when economic prosperity nurtured extremely healthy market returns for insurers, owners of fixed annuities could sometimes receive double-digit interest rates during their annuities� early years. Today�s initial interest rates are usually in the single digits. Some insurers will offer higher interest rates when buyers pay a minimum premium up front for the annuity. The customer can also receive a higher initial rate by agreeing to a lengthier or steeper surrender charge. Opting for a 10-year surrender period, as opposed to a seven-year period, might boost one�s initial rate by a worthwhile amount.

The insurance company guarantees the initial rate for only a brief period of time, which is usually shorter than the duration of surrender charges. In general, the guarantee will last a year, although a few contracts have limited the guarantee to six months. Since the beginning of the new millennium, guarantees lasting for five years have become more common, and 10-year guarantees are no longer mere novelties.

Renewal Rates

After the guaranteed, initial interest rate on a deferred fixed annuity expires, the insurance company will begin crediting a new rate, sometimes known as a �renewal rate,� to the owner�s account. Like the initial rate, each renewal rate usually remains in effect for one year, but the insurer may alter the rate more or less frequently. It�s possible, for instance, for an insurer to introduce a new renewal rate each quarter.

Renewal rates present some elements of risk to owners of fixed annuities because the insurance company generally has the right to set renewal rates as it sees fit, and clients have almost no way of knowing how the company will credit their accounts in the future. The uncertainty involved with renewal rates explains why many people who write about insurance or work in the industry refer to some fixed, deferred annuities as �trust-me annuities.�

Many factors can contribute to unfavorable renewal rates for fixed annuities. In fairness to insurance companies, many reduced renewal rates arise because the bonds that insurers must purchase in order to guarantee a return of principal to their clients have been governmentally set at rates that do not allow companies to cover expenses and keep a reasonable profit. In other words, the insurers� investments no longer allow them to maintain an adequate spread. Sometimes, major changes at the company, such as a corporate merger, will lower renewal rates. At other unfortunate times, the issuing company will have planned to reduce rates significantly all along, and buyers eventually realize that the initial interest rate was merely a teaser to get unsuspecting customers in the door.

No matter the insurance company�s level of good faith, unexpectedly low renewal rates put annuity owners in a disgruntled state of mind. Those who have owned a fixed annuity long enough to avoid surrender charges are likely to cancel their contract if renewal rates become ridiculously small. Those who cannot break free from their contracts might start thinking about whether or not their investment will even keep pace with inflation and wonder if buying an annuity was, in fact, a big mistake.

Businesses and state governments have taken steps toward relieving consumers� nervousness regarding annuities� renewal rates. A few insurance companies sell annuity contracts that are actually guaranteed to earn more interest at renewal time. As the reader might have guessed, these products may credit initial interest rates that are lower than usual in order to compensate for the guaranteed increases.

The contract for a fixed deferred annuity will also list a �floor rate,� which adds some consumer protection to the renewal process. Even if the insurance company suffers through a tremendously tough fiscal year, it may not lower interest rates for its fixed deferred annuities below the floor rate.

A combination of competition and legal requirements actually makes it possible for a contract to feature two floor rates. The first floor rate might come completely from the insurer�s desire to attract customers and might only guarantee a minimum interest rate for a few years. For example, the insurer might decide to offer a floor rate of 5 percent for five years, after which the company reserves the right to credit renewal rates below 5 percent. However, even when the insurer offers its own temporary floor rate for renewals, regulators insist that annuity owners receive a floor rate that remains in effect throughout the length of the contract. So, if a company only guarantees a floor rate of 5 percent for five years, the contract might still state that the owner cannot receive interest below 3 percent during later years.

Based on industry reports dating all the way back to the 1970s, the floor rates for fixed deferred annuities seem to have decreased slowly but surely over the years. Standard minimum guarantees of 4.5 percent over the lifetime of a contract gave way to 4 percent minimum guarantees, which then slid down to 3.5 percent guarantees until the floor rates fell to 3 percent. By that point, the standard floor rate was no longer dictated by industry competition and was, instead, merely intended to comply with state statutes that had been enacted decades ago, back when interest rates near 10 percent were not uncommon for treasury notes. By 2002, the insurance industry had convinced itself that even the state-mandated 3 percent floor rates were too high and did not leave a big enough spread to cover commissions and various administrative costs. The National Association of Insurance Commissioners concurred and endorsed model regulations that set minimum floor rates somewhere between 1 percent and 3 percent, depending on interest rates of treasury notes. Insurance professionals and prospective buyers can find the specific, minimum requirements for floor rates in their state�s insurance code. For the purpose of an example, California�s treatment of floor rates for fixed deferred annuities is detailed in sections (d) (1) and (d) (2) of the following excerpt:

10168.25.  (a) This section shall apply to contracts issued on and after January 1, 2006, and may be applied by a company, on a contract-form-by-contract-form basis, to any contract issued on or after January 1, 2004, and before January 1, 2006.

   (b) The minimum values as specified in Sections 10168.3, 10168.4,

10168.5, 10168.6, and 10168.8 of any paid-up annuity, cash surrender or death benefits available under an annuity contract shall be based upon minimum nonforfeiture amounts as defined in this section.

   (c) (1) The minimum nonforfeiture amount at any time at or prior to the commencement of any annuity payments shall be equal to an accumulation up to that time, at the rates of interest indicated in subdivision (d), of the net considerations (as hereinafter defined) paid prior to  that time, decreased by the sum of  all of the following:

   (A) Any prior withdrawals from or partial surrenders of the contract, accumulated at the rates of interest indicated in subdivision (d).

   (B) An annual contract charge of fifty dollars ($50), accumulated at the rates of interest indicated in subdivision (d).

   (C) Any state premium tax paid by the company for the contract, accumulated at the rates of interest indicated in subdivision (d).

However, the minimum nonforfeiture amount may not be decreased by this amount if the premium tax is subsequently credited back to the company.

   (D) The amount of any indebtedness to the company on the contract, including interest due and accrued.

   (2) The net considerations for a given contract year used to define the minimum nonforfeiture amount shall be an amount equal to 87.5 percent of the gross considerations credited to the contract during that contract year.

   (d) The interest rate used in determining minimum nonforfeiture amounts shall be an annual rate of interest determined as the lesser of 3 percent per annum and the following, which shall be specified in the contract if the interest rate will be reset:

   (1) The five-year Constant Maturity Treasury Rate reported by the

Federal Reserve as of a date, or averaged over a period, rounded to the nearest one-twentieth of 1 percent, specified in the contract no longer than 15 months prior to the contract issue date or

redetermination date under paragraph (2), reduced by 125 basis points, where the resulting rate is not less than 1 percent.

   (2) The interest rate shall apply for an initial period and may be

redetermined for additional periods.  The redetermination date, basis, and period, if any, shall be stated in the contract.  The basis is the date, or average over a specified period, that produces the value of the five-year Constant Maturity Treasury Rate to be used at each redetermination date.

   (e) During the period or term that a contract provides substantive participation in an equity indexed benefit, it may increase the reduction described in paragraph (2) of subdivision (d) by up to an additional 100 basis points to reflect the value of the equity index benefit.  The present value at the contract issue date, and at each redetermination date thereafter, of the additional reduction shall not exceed the market value of the benefit.  The commissioner may require a demonstration that the present value of the additional reduction does not exceed the market value of the benefit.  Lacking a demonstration that is acceptable to the commissioner, the commissioner may disallow or limit the additional reduction.

   (f) The commissioner may adopt regulations to implement the provisions of subdivision (e) and to provide for further adjustments to the calculation of minimum nonforfeiture amounts for contracts that provide substantive participation in an equity index benefit and for other contracts with respect to which the commissioner determines adjustments are justified.

Crediting Methods for Fixed Deferred Annuities

Insurance companies credit interest in seemingly innumerable ways. For simplicity�s sake, we can break down their various methods and focus on two general practices.

The simplest crediting method is called �portfolio rating.� In portfolio rating, all money invested in an annuity earns the same amount of interest, regardless of when or if the owner paid multiple premiums to the insurance company. Suppose, for example, that the owner bought an annuity with an initial premium of $10,000 and invests another $5,000 in the annuity five years later. If the insurance company imposes a renewal rate of 5 percent and practices basic portfolio rating, it will credit 5 percent interest to the entire $15,000 investment until a new renewal rate goes into effect. Annuities bought with a single premium will be subjected to portfolio rating, and some annuities that require or allow for multiple premiums will also be subjected to portfolio rating.

Some annuity contracts call for the use of a crediting method called �banding,� which applies different interest rates to money in an annuity depending on when the owner made the investments. Imagine, once again, that an annuity owner buys the contract with an initial premium of $10,000 and invests an additional $5,000 in the annuity five years later. If the issuing company practices banding, the $10,000 initial premium will be credited with one interest rate, and the additional $5,000 will be credited with a different interest rate. If the owner makes another $5,000 payment to the insurance company, the contract might then call for a third interest rate to be applied to that latest portion of the principal. Usually, banding will result in higher interest rates being applied to the owner�s most recent contributions to the annuity and lower interest rates being applied to the owner�s earlier contributions. In a banded annuity, a single interest rate can apply to investments made in a single year or to investments made over a span of several years.

Bear in mind, however, that, in the cases of both portfolio rating and banding, we have looked at intentionally simplified examples. In reality, these crediting methods can be much more complicated. Many annuity contracts call for a hybrid form of portfolio rating and banding. In these situations, the insurance company might offer one interest rate for �new money� that the owner gives to the insurer within a year or so and another interest rate for �old money� that was paid to the insurer at any earlier date. Following a year or two, the new money may be lumped in with the old money, and all of those dollars will be credited via the portfolio method from that point forward.

Bonus Rates

When economic conditions do not lend themselves well to attractive interest rates for fixed annuities, or when one insurer merely wants to increase its profits or market share, a company might market annuities that feature �bonus rates.� A bonus typically ups the initial, guaranteed interest rate by a point or two, and, as reported by market analysts, some �super-bonuses� enhance the initial rate by at least four percentage points. Once the initial guarantee expires, a renewal rate will go into effect and will not include the bonus.

A true bonus rate can be a great deal, even if it only means the difference of earning 1 percent extra on the principal. Many of the bonus rates that are offered in good faith exist because insurance agents accept lower commissions than usual from sales of the corresponding contracts or at least agree to receive a larger portion of their usual commission down the road rather than shortly after a sale. In various other forms, an annuity with a bonus rate is too good to be true and can lure even a careful buyer into accepting contract terms and provisions that are not in the buyer�s best interest.

One common complaint about bonus rates is that the issuing company can earn its money back at renewal time by applying lower rates to bonus annuities than to regular annuities. Suppose a man and a woman each buy a fixed deferred annuity at the same time but from competing insurance companies. The woman buys her annuity without a bonus rate and is promised an 8 percent interest rate on her investment for one year. The man, meanwhile, jumps at the opportunity to get a 2 percent bonus that will help him earn a guaranteed 10 percent on his investment in the first year. After 12 months go by, the insurance companies introduce renewal rates for their clients. The woman�s insurer drops her interest rate to 7 percent, but the man�s insurer knocks rates down to 5 percent. Another year passes, after which both insurers decide against changing their interest rates, and the man begins to wonder if he should have ever bothered with the bonus rate in the first place.

Sometimes, the bonus rate has no noticeable effect on renewal rates but limits annuity owners� satisfaction in other ways. As the reader already knows, exchanging one annuity for another, perhaps based on an insurer�s offer of a bonus rate, will usually signal the beginning of a new surrender period that forces the owner to either relinquish access to invested funds for several years or face potentially stiff penalties. Even when no exchange is involved, the buyer might discover that the surrender charges for an annuity with a bonus rate are steeper and remain in effect longer than surrender charges for regular annuities.

Someone who takes advantage of a bonus rate might also find that the enhanced rate will not be credited to the principal under all circumstances. The insurer may reserve the right to rescind the bonus if the owner withdraws funds prematurely from the annuity. Some contracts place similar limits on beneficiaries by forcing them to receive death benefits in periodic installments if they want to receive interest created through the bonus rate.

Bait and Switch Tactics

All these warnings about initial rates, renewal rates and bonus rates for fixed deferred annuities relate, in some way, to an all-too-common sales technique known as �baiting and switching.� In a bait and switch, the issuing company lures customers into its doors by promising high interest rates that will be credited to an annuity in the contract�s early years and then turns its back on clients by crediting renewal rates that are shockingly low.

In addition to researching the current rates being offered by the issuing company, the consumer should consider how long those rates are likely to remain relatively stable. In some cases, the individual can make a reasonable prediction about future rates by taking a good, hard look at a company�s past rates. Illustrations used for sales purposes might suggest that renewal rates for a company�s fixed deferred annuity will hardly budge. But the company�s history of renewal rates, which will be based on facts rather than projections, might suggest otherwise. Specific products and contract provisions that can guard against unpredictable renewal rates for fixed deferred annuities are addressed in the next few sections of this material.

Bailout Provisions

If annuity shoppers are worried about renewal rates sinking to unpredictable levels once the initial guarantee has expired, they can shop for an annuity contract that includes a �bailout provision.� A bailout provision allows the owner to cancel the annuity contract without having to deal with surrender charges if renewal rates ever drop to a certain percentage. This provision is very similar to a guaranteed floor rate but promises liquidity instead of a rate of return.

Some bailout provisions allow owners to surrender their annuities if renewal rates ever fall below 1 percent of the initial guarantee. Others will permit a penalty-free, total withdrawal if the renewal rate is more than 1 percent less than the preceding renewal rate. The owner has 30 days following the imposition of the renewal rate to bail out of the contract and receive at least a return of principal. If the renewal rate is lower than the rate floor in the bailout provision, and the owner does not act, the contract renews at the new rate. Like all annuity payouts (including those that evade a surrender charge�s grasp), money returned to the owner as the result of a bailout will be treated as taxable income for the recipient.

Jump Rates

Some insurers sell riders that allow money accumulating in an annuity to earn interest at a �jump rate� if the rates offered to prospective customers are greater than the rates offered to existing customers. A jump rate basically turns back the clock on the annuity contract and replaces the renewal rate with whatever initial, guaranteed rate the issuing company is marketing at the time. So, if the renewal rate on an old annuity is 5 percent, but the initial rate on a similar, new annuity bought from the company is 7 percent, the rider would give the owner of the old annuity a one-time opportunity to earn 7 percent interest without having to pay any new premiums.

Like the initial rate in a regular annuity contract, the jump rate will only last temporarily, and a renewal rate will eventually kick in. Jump rates will usually introduce a new period during which the owner must pay surrender fees for any early withdrawals. If owners buy a contract that allows for a jump rate, they might need to wait a few years before taking the jump. Also, the chance to take the one-time jump might be limited to the early years of a contract.

CD Annuities

Because the fixed annuity features a guaranteed return of principal as well as assorted guarantees pertaining to credited interest on that principal, the product often draws comparisons to certificates of deposit and appeals to buyers who own CDs but are looking for steady income for their retirement years. Therefore, it should come as no surprise to the reader that banks, who are the public�s main source for CDs, compete with insurance companies for business in the fixed annuity market.

That said, the CD and the fixed annuity are by no means identical. Though both products force the issuing financial institution to invest clients� principal conservatively, the principal from a CD is invested in short-term financial instruments. Issuers of fixed annuities rely on long-term investments in the mortgage and bond markets.

The differing investment strategies behind CDs and fixed annuities affect the products� liquidity and rates of return and could help initially uncertain customers make a definitive choice between the two investment vehicles. The insurers� long-term investments in the mortgage and bond markets force owners of fixed annuities to give up penalty-free access to their principal for several years, thereby making the annuity far less liquid than the typical CD. In return for making a long-term commitment with the issuing financial institution, owners of fixed annuities can usually expect to earn more interest than they would normally receive through a CD.

All the comparisons made between fixed annuities and CDs undoubtedly led insurers to begin promoting products in the 1990s that combined the annuity�s best features with some of the liquidity and guarantees found in CDs. The �CD annuity� is still a fixed, deferred product that can produce a lifelong income stream, but, like a certificate of deposit, its interest rate is guaranteed for a length of time that is equal to or longer than the surrender period. As a result, the buyer does not need to worry about being locked into a contract and having no choice but to accept unpredictable renewal rates. The �trust me� element that we addressed earlier throughout our exploration of renewal rates and bait and switch tactics becomes a non-issue.

When opting for a CD annuity, the buyer chooses a desired pairing of years and interest rates from those offered by the insurance company and can end up with a contract that pays a guaranteed interest rate for anywhere between six months and 10 years. At the end of that chosen time period, the owner might have 30 days to decide what to do next. The owner can terminate the relationship with the issuing company and pay taxes on a total withdrawal or enter into a new contract with the insurance company that once again guarantees a specific interest rate but also imposes a fresh surrender period on all funds. Trade articles published in the past few years indicate that some CD annuity contracts allow owners to avoid additional surrender periods if they accept renewal rates chosen by the insurance company.

Total Return Annuities and More

The past 15 years have introduced a new set of fixed annuities to the investor�s market that scrap the traditional renewal process. These annuities come in several forms and go by several names, including �direct recognition annuities,� �pass-through annuities,� �bond-indexed annuities� and �total return annuities.� All these products still fall under the category of fixed annuities because they guarantee a return of principal and a minimum interest rate. They also keep the owner�s money out of such high-risk, high-return environments as the stock market.

The significant difference between most of these products and the usual fixed annuity is that the interest rate applied annually to the owner�s account will not be chosen by the insurance company. Instead, the insurance company invests money in low-risk bonds, is allowed to earn a contractually defined amount of interest on its investments (usually at least 3 percent) and credits excess interest to the owner�s account. The owner might have the opportunity to invest the principal in specific kinds of bonds as long as investments associated with these specific bonds equal a minimum dollar amount. In many ways, these annuities are similar to variable annuities that feature fixed account options and to another kind of fixed product called the �equity-indexed annuity.� Later sections of this course describe variable and equity-indexed annuities in greater detail.

Market Value Adjustments

Insurance sales professionals are not lying when they mention that a fixed annuity subjects the investor�s principal to no market risk, but that claim should at least be followed by an asterisk when a contract includes a market value adjustment (MVA). An MVA generally allows the insurance company to reduce the value of a fixed deferred annuity if money comes out of the account at a time when interest rates for fixed annuities are higher than they were when the owner entered into the contract. The MVA helps discourage annuity owners from surrendering their contracts and transferring their funds to a competing company that might be offering better guarantees. Perhaps most importantly, the MVA helps the insurance company cope with situations in which it must cash in long-term bonds prematurely in order to meet the demand for account withdrawals.

Because the economy can be so unpredictable, neither the insurer nor the consumer can say for certain how an MVA will affect the owner�s account. Still, the informed shopper can learn right away how the insurer will calculate the MVA, how the MVA will be applied to the account and when the MVA may be conducted, regardless of an absence of concrete numbers.

 Formulas for MVAs boil down to the difference between the current interest rate at the time of withdrawal and the rate applied to the annuity when the contract began. In a simplified example, suppose that a client bought an annuity when fixed rates stood at 6 percent and surrenders the annuity when fixed rates in the market stand at 9 percent. With the MVA in effect, the insurer would reduce the annuity�s value by at least 3 percent before handing the funds back to the owner.

According to the trade publication Best�s Review, some contracts enlarge the MVA by adding a percentage point or two to the difference between the old and new rates. Depending on the contract, the MVA may reduce the value of the entire account balance, just the principal investment, or just the owner�s accumulated interest. Some state governments have tried to find a balance between MVAs and contractual guarantees by instituting caps on the adjustments so that annuity owners can earn minimum interest and avoid losing some of their principal if they make a withdrawal at the wrong time.

Prospective buyers also deserve to know what sort of event will trigger an MVA. In general, the insurer will perform an MVA whenever the owner makes a full or partial withdrawal while the surrender period is in effect. The insurer then applies the appropriate surrender charge to the remaining funds. The MVA provision may disappear at the same time as the surrender charge if the owner keeps the contract in force for several years, but this is not a uniform practice across the industry. Some contracts give the insurer the right to perform an MVA on death benefits, and some make an MVA possible even if other surrender fees have expired and the owner has decided to annuitize the funds.

The preceding paragraphs probably make MVAs seem a little scary, as if these features were included in an annuity contract to confuse and may ultimately harm the consumer. It is, therefore, important to note that not every fixed deferred annuity will feature an MVA and that some buyers might actually prefer contracts with an MVA provision. It should not be overlooked that if an owner withdraws funds at a time when interest rates for fixed annuities are lower than when the person purchased his or her contract, the MVA can result in a credit to the owner�s account. Also, because the client who opts for a contract with an MVA is accepting more risk than someone who opts for a contract without this feature, an annuity that allows for an MVA will more often include comparatively high and long-lasting guarantees of interest.

Picking a Solid Insurer

If we set liquidity issues aside, we can generally say that fixed annuities are safe investments. After all, they guarantee a return of principal as well as some interest on that principal. At the very least, fixed annuities dwarf variable annuities in regard to the amount of investment risk they present to buyers. A variable annuity will rarely produce favorable returns unless the owner knows a thing or two about mutual funds and the stock market, but a fixed product can produce favorable results for less-experienced investors because the insurance company, rather than the contract owner, is the one putting premium payments to work in the financial markets.

Still, this does not mean that all insurance companies deserve the same amount of trust from the public and that two insurers offering the same initial interest rate on a fixed annuity are equally suitable business partners for someone who wants a lifetime income. Man-made or natural catastrophes�not to mention poor financial planning�have created occasional situations in which life insurance companies could no longer live up to the contractual promises they made to clients. Beneficiaries on life insurance policies have sometimes been denied full death benefits following a company�s collapse, and, indeed, some annuity owners have lost parts of their investments in similar situations.

A life insurance company�s stability ought to be important to owners of fixed annuities because, unlike variable premiums, money given to an insurance company for a fixed contract becomes part of what is known as the insurer�s �general account.� In contrast to other accounts held by the company, the general account may be accessed by creditors if the insurer becomes insolvent.

 As if that was not a big enough problem for investors, no federal entity insures the dollars that consumers put into annuities. Even when a person buys a fixed annuity from a bank, the product is not backed up by the Federal Deposit Insurance Corporation. Individual states have their own guaranty funds that impose taxes on solvent insurers in order to return some of the money owed to insolvent companies� clients. But the guaranty funds put a cap on the amount of money each unlucky annuity owner would receive in the event the issuing company collapses. This cap usually falls somewhere in the ballpark of $100,000. A failed insurer also leaves behind a considerable amount of legal and bureaucratic red tape, and the owner could end up waiting years for a refund.

A little research on the prospective buyer�s part can go a long way toward ensuring that thousands of dollars do not go into the wrong insurer�s general account. An examination of a company�s rate history for fixed annuities might hint at the insurer�s stability or lack thereof. Nervous consumers might feel more comfortable giving their money to a long-time insurer with an extensive history of modest yet consistent interest rates than to a new company that offers very high interest rates.

If consumers do not feel comfortable comparing and analyzing various statistics on their own, they can easily turn to reputable rating organizations, such as A.M. Best, Standard & Poor�s and Weiss Ratings, which give companies grades based on their financial health. In general, advisers suggest that their clients only do business with insurers who receive an A+ rating from A.M. Best, an AA rating from Standard & Poor�s or a B rating from Weiss Ratings. Of course, these are mere guidelines. A client can have a favorable experience with an annuity issued by a low-rated or unrated insurer, and a client can have a bad experience with an annuity from a highly esteemed, well-rated institution.