The Financial Stress TestPosted by Badger Coach on June 16th, 2014
Since the stock market crash of 2008, many owners of insurance policies and annuity contracts have become increasingly concerned about the financial capacity of these institutions to honor their promises. After decades of saving for retirement, the last thing you need is for your IRA Rollover to disappear because the insurance company offering you an annuity became insolvent. What can you do to protect yourself?
After accumulating enough money to enjoy a comfortable retirement, you will begin the decumulation phase of your investment portfolio. This spend-down phase requires you to allocate your funds in a manner that will ensure that you do not run out of money during retirement. This is a daunting task and one that cannot be taken lightly. There is no room for error.
So, what is a retiree without a pension plan to do? If you do not have a corporate pension to rely on, you are left with the option of leaving your money in the stock market or rolling it over into an annuity. To help resolve this dilemma, the insurance industry saw the opportunity, and developed an income rider that can be added, at the point of purchase, to a fixed index annuity or variable annuity. The income rider, much like a pension, promises to deliver guaranteed income for life. Please note that income riders are not created equal.
Rating Agency Conflicts
Like all guarantees or promises made by an insurance company, they are only as good as the claims paying ability (financial strength) of the insurance company. To help you feel good about the financial stability of your insurance company, oftentimes your financial advisor or insurance agent will point to its A.M. Best rating. What you are not told is that A.M. Best or the other rating agencies are paid a fee by the insurance companies for the ratings they hand out.
However, many believe that the conflicts of interest between the insurance carriersand the ratings agencies fueled the stock market collapse of 2008, and forced Congress to hold hearings on the matter. During these Congressional hearings, the public learned that compensation conflicts of interest exist.
To ensure that your annuity or insurance policy provider is financially stable, hire someone with the skills to perform a financial stress test. This is usually performed by a qualified fee-only financial consultant, such as Badger Coach, who is a licensed fiduciary. You should perform this test once every three to five years. Depending on who you use for this type of service, it can cost between $350 and $500. Your peace of mind is worth the cost.