Business Development Officer, T.D. McNeil Insurance Services, Fresno, California
The investment risk in a fixed annuity is born by the issuing life insurance company. The company guarantees a rate of interest on money deposited in the contract. Most companies also use a “new “and “old” money rate to increase the rate of return as much as possible. Many annuities today are paying much more interest that they could receive elsewhere because it is guaranteed.
Renwanz Insurance & Financial Solutions, Carlsbad, CA
When you purchase a fixed annuity, your premiums are put into the insurance company's general account which holds the vast majority of their investments. Insurance companies have an excellent track record of investing in rock solid assets and you should check their financial stability and credit ratings through services such as A.M. Best and Standard Poor's rating services. The insurance company guarantees your principal plus a minimum rate of return. The insurance company bears the investment risk of your fixed annuity. That doesn't clear you of risk altogether. Insurance companies always add the caveat that guarantees are based on the claims paying ability of the insurance company.
So, in the end, the annuity owner bears a certain level of risk as well. You need to weigh that risk against other places you put your investments and decide which institution fits your risk profile.
That is a great question! One of the main reasons fixed annuities have been an investment favorite is that between the guarantees and the known rate of return there is very little risk for investors. Because the rate is guaranteed, the whole risk is borne by the insurance company, and not you. The sum total of your risk is in whether the rate paid is better than what you may have made in another form of investment. This is a very safe investment, and I'm glad you asked! Thanks!
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So, in the end, the annuity owner bears a certain level of risk as well. You need to weigh that risk against other places you put your investments and decide which institution fits your risk profile.