Are Annuities Safe?

One of the benefits of annuities is that they offer a guaranteed income — often for life — providing security in retirement. With prudent management and understanding of their risks, annuities can serve as a safe element in your portfolio.

Key Facts About Annuities and Safety

1. Annuities are generally safe products, with some of their main benefits being principal protection and shield from market risk.
2. The built-in safety of annuities is part of what makes them such an enticing product for conservative investors.
3. Annuities aren’t FDIC-insured, which can worry customers regarding what happens to their money if their provider goes bankrupt. However, state guaranty associations act as a safety net in these situations.
4. Risk also varies by the type of annuity you buy. For example, while something like a MYGA carries little risk, a variable annuity could result in some loss of your principal.

How the Safety of Annuities Compares to Other Options

Annuities function differently from comparable options in that they are not investments but insurance products. 

Depending on the product type, they typically are not exposed to market risk like stocks or bonds. Your principal is also protected, meaning there is no risk of losing your initial investment.

Additionally, the annuitization process can yield you limitless income. Bonds can provide a dependable stream of interest income until maturity. Stocks can grow wealth over very long holding periods. But neither of these investments can convert to a lifetime of guaranteed income at any point in time.

Annuities vs. Stocks and Bonds

	Annuities	Stocks	Bonds
Your Principal Investment is Protected and Not at Risk	Yes	No	No
Considered a Low-Risk Investment/Product	Yes	No	Yes
Can Be Converted into Guaranteed Lifetime Payments	Yes	No	No

Some differences can make stocks or bonds a better choice based on your circumstances. Stocks, for instance, come with a lot more risk and exposure to loss but also can result in much higher gains, particularly in the short term.

The predictability of annuities is what makes them so attractive. You may experience less growth, but you can do so without the risk of losing your initial investment and with the ability to earn guaranteed payments.

Some types of annuities can also be designed to mimic the features of stocks and bonds. Fixed annuities can simulate the returns of bonds, while fixed index annuities can be tied to the performance of an index like the S&P 500 while still protecting your principal in exchange for a cap on returns.

I use annuity contracts in the financial planning process as safe and low risk products, and many come with guarantees such as rate guarantees or income riders. Compared to other products that generally have a market risk factor, annuities are lesser risk, and many will also secure your principle. Many of my older clients enjoy having that protection as they get older since they can’t afford to risk their principle. During the fact finder, I make sure that they understand this clearly, that they may sacrifice returns that a market product may give them potentially but have the security of their investment. Annuities sold correctly fit well within most people’s financial portfolio.

Aamir M. Chalisa, MBA, LUTCF, MDRTGeneral Manager at Futurity First Insurance Group

Aamir M. Chalisa is the GM at Futurity First, leading Oak Brook’s top branch. With 30+ years’ expertise, chairs GAMA Global, driving diversity worldwide.

What Are the Inherent Risks of Annuities?

Timing can play a big role in the risk of annuities. For example, you could lock in an annuity rate for several years, and then shortly after, see a much larger rate you could have taken advantage of.

There’s also the concern that you could die soon after buying an annuity. Since lifetime payments are one of the main benefits of an annuity, an early death would significantly dampen the product value.

Like some other strategies, you may also risk your money being outpaced by inflation. Some annuity companies address this by offering inflation riders for an additional cost or allowing you to structure your payments to start low and steadily increase over time.

For most annuity types, the possibility of losing your principal is minuscule. The main risk would be a rare situation where the annuity’s issuer goes bankrupt or shuts down. Even then, state guaranty associations would likely offer coverage and help you recoup that money.

Are Some Types of Annuities Safer Than Others?

Different types of annuities come with varying levels of risk. Some annuities are both straightforward and safe products.

This includes single premium immediate annuities, which are purchased with a lump sum and often converted into payments immediately. 

Additionally, fixed annuities like multi-year guaranteed annuities offer a set level of growth and function similarly to bonds.

Fixed index annuities offer some reserved market exposure by being tied to an index, allowing you to experience fluctuating growth without ever putting your principal on the line.

But not all types are as risk-free.

The Risks of Variable Annuities

The riskiest type of annuity that is widely available is the variable annuity. This product allocates your money into a legitimate investment portfolio, essentially placing your money into potentially higher-earning items like stocks and bonds, according to the Maryland Insurance Administration. 

They can be a useful way to invest — particularly since they are tax-deferred products — but many of the common rules of annuities do not apply here. With variable annuities, you can experience much more volatility and risk losing your money.

Some annuities make sense in specific situations, and it’s important to understand your needs before purchasing.

Variable annuities, for example, are often employed by those who have already maxed out their 401(k)s and IRAs as an additional way to build up future retirement savings. This strategy doesn’t make sense for everyone.

Frequently Asked Questions About Annuity Safety