Image for Investment Risk of Annuities

Investment Risk of Annuities

(2 of 6)

Investment Risk of Annuities

Like most other types of savings and investment instruments, annuities do not come without risk. Depending on whether you purchase a fixed annuity or a variable annuity (or a combination of the two), you will experience varying degrees of investment risk. Investment risk is the risk that your underlying assets will default, depreciate, or lose purchasing power over time.

Things To Know

  • Investment risk is the risk that your underlying assets will default, depreciate, or lose purchasing power over time.
  • With a fixed annuity, it is the insurance company that bears the investment risk.
  • With a variable annuity, it is the annuitant who bears the investment risk.

Risks of fixed annuities

Fixed annuity premiums are invested in the insurance company’s general account—the account that holds almost all of the company’s assets. Only fixed annuity and traditional life insurance contract (whole life and universal life) premiums can be placed into the general account. These monies are then invested in very stable assets, and the insurance company guarantees the annuitant’s principal as well as a guaranteed minimum rate of return, even if the underlying assets underperform the guaranteed rate. As such, it is the insurance company that bears the investment risk of a fixed annuity. Keep in mind, however, that if the company’s underlying assets are not as safe and stable as they should be—much like the situation that occurred in the early 1990s—it is possible, though unlikely, that a fixed annuity’s value could vanish. Such guarantees are only as good as the financial strength of the insurance company making the guarantee.

Risks of variable annuities

Variable annuity premiums are invested in the insurance company’s separate account—the account that holds only funds paid by variable annuity and variable life insurance contract holders. By law, these funds are kept separate from general account assets and are invested in a portfolio of securities. Much like any other equity investment, a variable annuity is subject to investment risk at all times. This means that the annuitant’s account values can and will fluctuate with daily market values. Thus, unlike with a fixed annuity, it is the annuitant, not the insurance company, who bears the investment risk.

Rating agencies evaluate risks for you

In order to help investors decide which annuities (and issuers) are right for them, there are a number of independent rating agencies that evaluate the relative risk of one insurance company against another. A.M. Best, Moody’s Investor Services, Fitch, and Standard & Poor’s are the four primary rating agencies that provide this service. Generally speaking, the top ratings—such as AAA down to AA- —are reserved only for the strongest of companies.

More on risk

Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Guarantees are based on the claims-paying ability of the issuer. Withdrawals made prior to age 59½ are subject to a 10% IRS penalty tax, and surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns and principal value of the available sub-account portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than their original value.

Investors should consider the investment objectives, risks, charges, and expenses of the variable annuity contract and sub-account carefully before investing. The prospectus contains this and other information about the variable annuity contract and sub-accounts. You can obtain contract and sub-account prospectuses from your financial representative. Read prospectuses carefully before investing.