- Insurance companies are in the business of managing risk. Individuals buy insurance to reduce their personal risk in a given situation---in the case of annuities people buy them to avoid the risk of running out of money. Because insurers are trusted with managing so much capital, they are very good at managing funds prudently. Insurance companies use sophisticated investment techniques to manage the premium dollars they receive and use mortality statistics to correctly price their annuity contracts.
- Financial strength ratings are ratings given to insurance and other financial institutions by ratings agencies. Financial strength ratings are a measure of how stable a company is. When considering the purchase of an annuity, consider the financial strength of the issuing company. The stronger the ratings, the safer the investment. Even the lowest-rated insurers RARELY go out of business, and those who do make good on their obligations, but a little homework is a good idea.
-
When all else fails, every consumer can fall back on state guarantee funds. Guarantee funds operate in each state and protect consumers in the event an insurance company goes under. While there are limits on the coverage, it is an additional layer of protection.
Given the track records that insurance companies have on making good on their annuity contracts, the availability of financially strong insurers offering annuity contracts and state guarantee funds, investing in annuities is quite safe.
