How Investors Can Lose with Annuities and Whole Life Policies

“Look, Bruce!”, my 85 year old mother-in-law exclaimed, waving a letter over her head. “My annuity is now up to $85,000. I can’t withdraw my money for 6 months but I don’t need it now anyway”. That got my attention. Why couldn’t she withdraw? Turns out, Standard Life of Indiana, her annuity company, had sent her a second letter. That letter informed all policy holders: Standard Life was now under an “Order of Rehabilitation” with the state of Indiana. The letter went on to assure policy holders that all annuity contract terms would be honored except “partial and full surrenders clauses”. This is kind of like a bank holiday for an insurance company.

For more information policy holders were referred to the website. On the website the first question in the FAQ section is “What happened to Standard Life Insurance Company?” — a good, if not particularly encouraging start. Other questions address issues such as financial condition and safety. The answers were reassuring but vague and short on specifics.

The court filed “Order of Rehabilitation” document is more direct. Basically, Indiana state Insurance Commissioner Jim Atterholt and his appointees now have control of Standard Life of Indiana. All power formerly vested to the directors, officers and managers now resides with the State Commissioner. For those who would like to see the court filed document, go here. The rehab action is essential so as to prevent a run on the company while the state figures out just what the assets are worth. A minimum of six months is needed and that time period may be extended.

Standard Life of Indiana may have been a good company at one time. However, It was acquired in the 1990’s by Capital Assurance Corporation, a private company. Obviously, they made investment mistakes and were caught in last years slump. I don’t know what the outcome will be for Standard Life’s 40,000 policy holders such as my mother-in-law. It is probably safe to say that after bad investments are written down and legal and other state fees are assessed policy holders will take a significant haircut.

Now, I do not know a lot about annuities and the Standard Life of Indiana action is not new (the court document was filed December 18, 2008). I do know that funds invested in fixed annuities and whole life policies go into the companies’ balance sheet and will take a hit along with the balance sheet, but how many policy holders know that?

The purpose of this article is to alert fixed annuity and whole life policy holders: You cannot assume you are 100% safe. The products are only as good as the company and its investments.

Annuities and life insurance are often sold to financially unsophisticated and/or elderly people. Even with state regulation, the potential for abuse in these non-transparent investments is present

I would be careful with all fixed annuity and whole life products, especially those held by AIG affiliates (AIG), and large annuity providers such as Genworth (GNW), Hartford (HIG) and Allstate (ALL), companies whose stocks and balance sheets have show significant weakness.

It is not easy finding the financial standing of many annuity and whole life holders. Some, such as Standard Life of Indiana, are privately held. Others are large company subsidiaries (with different names) or international firms such as Allianz (AZ) or Aviva (AIVAF.PK). Many large banks with shaky balance sheets hold annuity money. The rating firms' gradings have been overly optimistic. Those sophisticated in financial analysis may be able to track this stuff down but the vast majority of annuity and whole life policy holders are clueless.

Disclosure: No positions in any of the above mentioned companies.

Comments

[IndexedAnnu...:]

Bruce,

Perhaps you are forgetting the fact that insurance owners are protected by the state Guaranty Fund? It doesn't matter what state your mother-in-law lives in, she will still be guaranteed to receive her full $85,000 of annuity value. The minimum amount of coverage for any state is currently $100,000. For more information, see nohlga.com.

Sheryl J. Moore
President and CEO
AnnuitySpecs.com
LifeSpecs.com
Advantage Group Associates, Inc.

May 06 10:09 AM

[Jimitee:]

You said it best and I commend you. YOU DON'T KNOW ALOT ABOUT ANNUITIES..."
Why would you give advice on this without knowing an awful lot???
Things like statutory surplus or excess capital surplus. (Hartford as an example has over 400% of capital needed to pay annuity claims) It is shameful that your allowed to get this meaningless info on the forum. Please go and find an EXPERT on annuities for your next article.

May 06 10:16 AM

[Bennett:]

Allianz has a solvency ratio of 161%...do your home work!

May 06 10:23 AM

[Bruce Vande...:]

The article's point is annuity buyers, despite industry assurances, CAN be damaged Ask the 40,000 policy holders of Standard LIfe of Indiana. With hundreds of life insurance companies I suspect Standard Life of Indiana is not alone

Would freezing your savings for six months, a year or more, not be damaging to you? How much can/will fiscally strapped states guarantee policies in a multiple failure type environment These questions should not be swept under the rug.

It is irresponsible to take a condescending, "You don't understand. Everything is fine. Don't worry. We know what is best for you." attitude. All too often in this current crisis we have heard that line, usually trumpeted loudest just before failure.

The article is also a plea for more transparency. jimitee makes my point precisely. Why should we have to be "experts" to understand the safety of annuities? We have the internet. How about posting on company websites easily assessable pie charts showing where the investments are. It should be updated on at least a monthly basis?

May 06 01:13 PM

[S Brent Parker:]

Uhhmm, perhaps you should do your homework before writng an article about an industry you admittedly know very little or nothing about. The Legal Reserve System was formed in 1807 (over 200 yrs without a problem) to monitor the Life Insurance companies in America. It states that an Insurance company MUST hold at least 85% of insurance death benefit funds in a seperate account (called the General Account) for any and ALL future claims. And because of this, not ONE insurance company has failed to pay a death benefit claim due to insolvency in this country...EVER. This is due in large part because each State governs the insurance industry, not the Federal Government. So, your grandmother's retirement money is safe! It sounds to me that she is a very smart women because she understands that a sound financial plan BEGINS with Life Insurance. By the way, the insurance companies that you bashed have a long history of paying claims and still remain financially sound! I do have a question for you sir, do you have a sound financial plan in place beginning with Life Insurance?

S. Brent Parker
The Hartford
Middle America

May 06 03:04 PM

[Bruce Vande...:]

Asking life insurance customers "to be careful", as I did, is not "bashing".

AIG stock, in the last 52 weeks, has been off 52 week highs as much as 99%, Genworth as much as 97%, Hartford as much as 95%. Prices are now up, but still down near 80% or more. If you are entrusting your life savings with these companies the least you can do is to be "careful".

On May 06 03:04 PM S Brent Parker wrote:

By the way, the insurance companies
> that you bashed have a long history of paying claims and still remain
> financially sound!

May 07 07:42 AM

[Scott A Olson:]

The misunderstanding, Bruce, is that you think that Genworth, Hartford, Allianz, AIG, etc are insurance companies. They are not. They are publicly traded financial holding companies that own insurance companies. The insurance companies owned by these holding companies are highly regulated and solvent.

Quoting the California Insurance Commission regarding AIG last fall: "The financial issues all come from the parent company, AIG, and not its subsidiary insurance companies."

Kiplinger's had a great article explaining the same thing:

www.kiplinger.com/colu...

"The insurance subsidiaries are solvent and able to pay their obligations," says Sandy Praeger, president of the National Association of Insurance Commissioners."

I think the reason that some of the posts seem condescending is because one of the first things taught to insurance agents is how the industry is regulated and extremely safe and conservative--as it should be. Since every insurance agent learns this in "Insurance 101", they can be quite shocked when a "personal finance" blogger doesn't even know the very basics of the insurance industry.

Please try to understand their condescension.

May 08 12:54 AM

[Bruce Vande...:]

Scott.
I appreciate your input. I will keep tabs on my mother-in-laws frozen Standard Life of Indiana policy and update here when it is resolved. However, it is a fact that her and the 40,000 other investor/policy holders have had their accounts frozen (see their website at standardlifeofindiana.com) for at least 6 months starting last December. Even though it was the major theme of my article none of my critics seem to want to touch it. Anyone?

You and others may wish to read David Merkel's extensive (8 parts) analysis of AIG's domestic life companies in which he worked for three years. In his summary he says: "Without the help of the US Government, many of them would have failed." Search Seeking Alpha on David Merkel to find it. David has an extensive and lengthy back ground in the insurance and finance, he cannot be easily dismissed as "not knowing Insurance 101".

On May 08 12:54 AM Scott A Olson wrote:

> The misunderstanding, Bruce, is that you think that Genworth, Hartford,
> Allianz, AIG, etc are insurance companies. They are not. They are
> publicly traded financial holding companies that own insurance companies.
> The insurance companies owned by these holding companies are highly
> regulated and solvent.
>
> Quoting the California Insurance Commission regarding AIG last fall:
> "The financial issues all come from the parent company, AIG, and
> not its subsidiary insurance companies."
>
> Kiplinger's had a great article explaining the same thing:
>
> www.kiplinger.com/colu...
>
> "The insurance subsidiaries are solvent and able to pay their obligations,"
> says Sandy Praeger, president of the National Association of Insurance
> Commissioners."
>
> I think the reason that some of the posts seem condescending is because
> one of the first things taught to insurance agents is how the industry
> is regulated and extremely safe and conservative--as it should be.
> Since every insurance agent learns this in "Insurance 101", they
> can be quite shocked when a "personal finance" blogger doesn't even
> know the very basics of the insurance industry.
>
> Please try to understand their condescension.
>
>

May 08 12:41 PM

[Tom Cochrane:]

I think the article is outstanding Bruce.

The info about dealing with lack of transparency/credit risk of privately held insurers such as Standard Life of Indiana is great.

I also thought the comments regarding other vulnerable players such as Hartford were very worthwhile.

There were a couple follow-ups commenting on state guarantee funds. Not sure all states cover and not all of those that do up to $100K.

Might be worth noting that diversification among insurers (e.g. spreading a $300K annuity among 3-4 insurers) and time diversification (e.g. laddering annuity purchasing over time) are worthwhile risk mitigation approaches.

May 08 03:08 PM

[Michael McD...:]

Different states guarantee funds have different amounts for products sold by life insurance companies, many are guaranteed to $100,000 and some have increased to $250,000. If you look at your states' guarantee fund website you'll see a list of companies that went bankrupt, most are small no name companies.

Life insurance, annuities, and long term care insurance are heavily regulated. The problem with AIG was the non-regulated derivatives. The AIG life insurance division is doing fine. Genworth stock tanked not because of derivatives but because of it's mortgage insurance division, something every new homeowner must buy. The Genworth life division is doing fine.

Regulation shouldn't shackle business to costly inefficient bureaucracy, it should be a beacon to steer through the waters of commerce, and when the beacon is turned off or ignored, the ship might go aground.

Jun 04 03:41 PM

[Tom Cochrane:]

Why doesn't someone develop an empirical measure of credit risk that is based on historical insurer defaults and the actual damage (net of state guarantee funds) that has been done to annuity owners?

AM Best, Fitch, etc solvency ratings are fine, but really falls short in addressing the sort of catch-all and extraordinarily common refrain that "the annuity is only as safe as the insurer providing it."

There really has not been much actual $$ damage to policyholders over the years on an aggregate basis--particularly when compared to the damage that has resulted from capital markets risk.

Would be great to simply point to a single probability that captures the potential risk that insurer default presents to annuity owners.

Maybe something like this exists? If so, please provide a link.

Oct 21 02:15 PM