August 27, 2016 • By Dennis Beaver
For anyone thinking of moving a large amount of money from a retirement account into an insurance annuity at this time, it could be a terrible decision.
“You’ve got to think this over very carefully. Do not be conned by a salesman looking only for a huge commission on the sale of an annuity, and, absolutely do not put all your eggs in one basket!” warns New York attorney Edward Stone.
As one of a handful of lawyers in North America who specialize in life insurance/annuity company failures — that’s right, failures with policyholders suffering huge losses — Stone’s advice merits serious attention, especially now.
As he explained:
“Insurance companies are in a near-zero interest rate environment which is a very real threat to their ability of honoring promises to policyholders. How can they continue to guarantee rates of return that exceed actual returns on their investments? Either you rob Peter to pay Paul or chase risk or some combination of both.”
He is not alone with this warning. In April of 2015, Laurence D. Fink, CEO of BlackRock Inc., the world’s largest asset manager, addressed the reality of what low interest rates mean to the survival of life insurance companies:
“Low interest rate policies by central banks around the world threaten insurance companies and pension funds. As we live in a world of persistent low rates and negative rates, we are destroying the value of pension funds [and] the viability of insurance companies.”
As we all know, those rates are virtually the same, which Stone see as compounding, “ ‘Concentration Risk’ with certain providers having taken on billions of dollars in pension obligations transferred by some of America’s largest corporations — Verizon, AT&T, Motorola, Ford, GM — to list just a few.
“They wanted to rid themselves of pension obligations to employees and retirees, so they took pension assets and gave that money to several of the nation’s largest life insurance companies who then issued group annuity contracts to replace defined benefit plan obligations.
“An enormous bet was made that they can earn more on their assets than they promised to pay out overtime to annuitants. These promises may prove to be extraordinarily difficult to keep,” Stone observes, explaining why:
“Historically, safe, fixed income corporate and governmental bonds were the mainstay of a life insurer’s investment portfolio. Laddered bond portfolios were constructed to match expected payout obligations. It was safe and predictable.
“But now, it’s a different world, and policyholder’s money goes into riskier and riskier investments, chasing yield. Instead of boring and safe, billions of dollars of retirement money is in the Wall Street Casino, making life insurance products less secure than ever before.”
“Far from it,” he quickly replied. Annuities can be appropriate and reasonably safe if you know how to protect yourself.”
Stone’s warning, “Not All Eggs in One Basket” is more important to heed today than ever before, for three reasons, as he describes:
(1) Salespeople tell you that if a company gets in trouble, others will always step in to protect policyholders and no one has ever lost a penny with a life insurance or an annuity. That is completely false. Millions of dollars of policyholder’s money has in fact been lost in company failures.
(2) You may hear that FDIC protects policyholders in the event of a failure. This is false.
(3) While illegal to use as a sales tactic, you may also be told that every state has a Guarantee Association which fully protects amounts in a life insurance policy or annuity.
This is partially correct.
“State Guarantee Associations cover insurance company insolvencies, but the amount of protection varies greatly depending upon your state of residence, and in most instances ranges from 250 to 500 thousand dollars per individual, per lifetime, per insurance company, regardless of the present value of the annuity or life insurance policy. In California, it is $300,000.”
This means the person who takes a million dollar IRA and puts it into an annuity with a single insurance company could lose hundreds of thousands of dollars if it failed. That has happened before.
“The solution is to use more than one annuity company, regardless of what a sales person wants. Be sure that your present cash value is well below your state’s Guarantee Association limit.
“We are facing a pension crisis which is already putting a strain on the insurance industry. No one is too big to fail,” Stone cautions.
Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.