If you have an annuity and are relying on it to provide for your retirement, then you may be feeling a little tense these days. Case in point: Standard & Poor's Ratings Services recently downgraded Hartford Financial Services Group's (Stock Quote: HIG) credit rating. That's bad news for the number-one issuer of variable annuities offered through banks (as of 2007, according to the Insurance Information Institute): It means the company has to boost its cash reserves at a time when money is hard to come by.
Any hint of fragility at an annuity issuer causes its customers to wonder whether they’ll receive the payments they’re counting on in the future.
It's not surprising that the safety of annuities is in question. After all, annuities rely almost entirely on the financial stability of the insurance carrier that offers them. And along with the Hartford downgrade, S&P Ratings Services also lowered ratings on other insurers, including MetLife (Stock Quote: MET) and Prudential Financial Inc. (Stock Quote: PRU). The downgrades come on the heels of the $61.7 billion loss by American International Group (Stock Quote: AIG) in the fourth quarter of 2008 -- the biggest loss in corporate history. There's no question that the insurance industry is struggling.
But the long-term outlook for the industry may not be so bleak. "The insurance industry has been good about rescuing its own, and Hartford will probably be absorbed," says Dean Barber, president of Kansas-based Barber Financial Group. "But in the long-term, the fees charged for guaranteed benefits will likely increase, while the benefits themselves will probably decrease."
The benefits at risk are the guarantees offered by many insurers that the principal invested in a variable annuity will be available for withdrawal either through a lifetime withdrawal benefit (LWB) or a guaranteed minimum withdrawal benefit (GMWB). With both guarantees, your investment can grow along with the stock market, but your principal remains safe. If The Hartford failed and was not rescued, its guarantees would be at risk. Investors would receive the value of their holdings—but if those holdings had posted investment losses the annuity-holders wouldn’t get back all of the money they invested.
Barber recommends discussing your situation with the advisor that sold you any annuities you currently hold, whether he or she is from The Hartford or not. "The worst thing for people to do is to panic," says Barber. "Find out the strength of the company, and the state of your annuity."
If you are considering buying an annuity, be sure to consult with an independent advisor who won't benefit by selling you one particular product over another. "These are complex things that involve highly specialized programs," says Barber. "The same products are definitely not going to fit every person and every situation."