ANNUITIES

Our slogan, “Let’s talk Safe Money^®” holds true when talking about annuities and retirement planning.

FAKE NEWS - THE REAL TRUTH ABOUT ANNUITIES

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WHY ANNUITIES?

Annuities have been around for centuries, actually since the Roman Empire. They have been used as a savings vehicle, and primarily as a way to provide a lifetime guaranteed income. About 20 years ago the first indexed annuities came on the market and they have become, by far, the most popular form of annuity. The primary attraction is the potential for a higher rate of return than the traditional fixed annuity.

The graph below shows the difference between two different investments – the stock market (S&P 500) and an indexed annuity. As you can see from the graph, the green line, which is the indexed annuity, has performed extremely well. The fact that the indexed annuity has never had a negative year, but has been able to participate in a portion of the market gains, has made it, over the long term, an attractive investment option.

Clearly, the most attractive benefits of indexed annuities is that there is no loss of principal because of stock market declines.

Indexed annuities offer a low, guaranteed, interest rate plus the potential for additional interest credits based on a percentage of the gains of a specified stock market index – the S&P 500® or other, sometimes less traditional, indexes. No matter how much the stock market declines, the annuity owner’s accounts are not affected, because annuity premiums do not directly participate in the stock market by purchasing individual stocks or mutual funds.

LS Financial Group Co-Founder and CEO Len Strickler has co-authored 2 books “The Power of Leadership: Leading for Results” and “5 Keys to a Successful Retirement” and is also the host of Safety in Retirement TV and Radio, airing in South Florida.

Recently, Len formed an alliance as a collaborating author with retirement specialist, Economist and Author, Mr. Tom Hegna, in 2 of Tom’s recent books, “Pay Checks and Play Checks”and “Don’t Worry, Retire Happy.” At right, is a video from Tom’s Special PBS Show on the number one risk retirees face.

BANKS VS. INSURANCE COMPANIES

Well, here we go again folks.

We have a financial system that has been fractured, and a reminder of the 2008 housing bubble, with now what is believed to effect not only Silicon Valley Bank or Signature Bank, but trickle down to many regional banks as well.

We thought we had all these safeguards in place with the Dodd-Frank Act passed in 2010 under Obama. But yet, here we are again. I heard word today that UBS has purchased Credit Swisse for $3 billion, but again this was not an issue with the insurance side of their balance sheet but the banking side. Two very different divisions with very different goals as we will see here in this report.

The past 2 weeks, this question has come up on multiple calls into our office:

Which is safer “banks or insurance companies” for my retirement options?

This article will focus on life insurance companies for the insurer side of the discussion.

Banks & Insurance Companies: 2 Different Roles

Insurance Companies

Life insurance companies are in the business of risk management. They sell life insurance and annuity products to their clients to protect against loss; such as premature death, loss of income, long- term care, homeowner risks, auto risks, etc.

Policyholders pay premiums, either as a 1 lump sum or regular payments over time, to life insurance companies. In turn, life insurers put this money into long-term investments such as treasury securities, investment-grade bonds, and commercial real estate holdings.

The insurance companies use these monies to uphold their insured promises to their customers. Since they are investing and overseeing these dollars for their own benefit, life insurance companies do not create money.

The interesting thing here, folks, is they have CASH on hand!

Banks

On the other hand, banks are largely in the business of making money through lending. They collect deposits from customers and pay interest for use of the money. From there, banks lend the money to borrowers who need capital for business reasons. In return, these borrowers pay a higher rate for their loans than the interest rate paid to bank depositors.

In this way, banks use money from customer deposits to build a larger base of loans and make money on the payments they collect from borrowers.

Bank customers generally only want only so much access to their deposits each day. As a result, banks are able to keep a certain number of deposits in reserves and then use the remaining deposits for their lending.

They do not have the CASH on hand!

What About this Label “FDIC Insured”

The FDIC Insurance was created back during the great depression in the wake of so many banks going under. The irony is with all this new regulation, Dodd-Frank Act and FDIC, the Federal Government still could not uphold the system in 2008.

In 2008, there were over 1,200 commercial banks that got into financial trouble with major runs on the banking system. Yet, here we are again, folks. The problem was they could not get their money out as the banks did not have the funds on hand.

The FDIC went $9 billion in debt and the U.S. treasury had to loan them money to make depositors whole.

But here is the bigger issue, and we will see it again folks, the FDIC only has abut 18% of the reserves they need to make everyone whole.

During this same period, only one life insurance company became insolvent. Though AIG did get a bailout, it was not their insurance side of the business, as their balance sheet for that division was strong as ever. It was the rest of the money management side that bet on mortgage-backed securities and hedge fund debacles.

Are Insurance Companies A Safer Bet?

You be the judge.

Life insurance companies, on the other hand, have much stricter requirements regarding the cash reserves that they maintain. By law, life insurers in all 50 states must have at least one dollar in cash reserves for every dollar of premium that is issued in the form of annuities or life insurance.

In other words, life insurers must keep at least 100% of their ‘deposits’ as minimum reserves. Many insurance companies go beyond this, maintaining a reserve surplus above 100% so they can make good on their guarantees to policyholders.

Of course, the life insurance industry cannot print more money. But for all practical purposes, it doesn’t matter because life insurance companies have the CASH.

Furthermore, there is no limit on the amount of money that is backed by cash reserve.

Many life insurance companies can accept purchases for even millions of dollars. However, they must be able to track the source of money to ensure that it came from a legal venture, and of course, no money laundering activities.

FDIC for Insurance Companies

What if a life insurance company was to become insolvent? Then reinsurance companies would step in and cover policyholder losses up to a certain amount.

Although the exact amount can vary by company, state, and situation, the limit is usually quite high, such as $300,000. In the State of Florida, any Annuity sold is insured by the State up to $250,000.

If an investor had a million dollars to invest they would need to spread their money out among several banks in order to make sure that it’s all insured. One, of course, could do the same with an insurance company. However, alternatively, they could put the entire $1,000,000 with a life insurance company and enjoy the guarantee of dollar-for-dollar cash reserves backing the entire amount.

The life insurance industry has held this record with success for hundreds of years.

So, if the bottom falls out of the economy, or our economic system otherwise fails, which institution would fare better? The answer to that would probably depend heavily on the specific factors involved in the fallout and how the public reacts to it.

But, in our opinion, most serious financial experts today know that in the end, your money is pretty darn secure with a life insurance company.

Finally, if you think that banks or Treasury securities are the only place to put your money, think again. It would most likely take the end of the world as we know it for the insurance industry to fail, with its trillions of dollars in collective cash reserves. Remember, insurance companies already have the CASH!

WATCH THESE VIDEOS TO LEARN MORE ABOUT ANNUITIES

An Introduction to Annuities

What are you looking forward to?

This protection from downside losses is a primary feature distinguishing indexed annuities from variable annuities. In variable annuities, your funds purchase investments in “sub-accounts.” For this reason, a variable annuity has the opportunity to increase in value when the market rises, but can also decrease in value in a declining market.

There are many different kinds of anuities and a very wide variety of riders available and if the agent has not properly determined the precise needs and desires of the client it can lead to the client purchasing an annuity that does not provide what the client truly requires. Our staff of experienced agents has had many decades of combined experience making sure that our clients receive the proper annuity based on their needs and desires.

HOW LONG WILL YOU LIVE

It’s something we all wish we knew – How Long Will I Live? And, while we can never truly know when our time will end, actuaries today have made estimating life expectancy a true science. Why? Because there are financial and retirement planning products offered, like annuities, that contain features such as GUARANTEED LIFETIME income benefits. Benefits such as these help to provide income security to many of today’s retirees. Because no one wants to worry about the possibility of outliving their money. Download our complimentary guide to learn more today.