Annuity Companies vs Banks

Welcome to Shooting It Straight with Stan. I’m your host, Stan The Annuity Man, America’s Annuity Agent, licensed in all 50 states, with an itch in my nose. Sorry about that—it wasn’t pretty.

What are you doing, Stan? Picking your nose like that! That’s gross! I get it. But you know, as you get older, everything starts falling apart—the nose, the eyes, everything. It’s all good.

Today’s Topic: Annuity Companies vs. Banks

Hey, today’s topic is a good one. Chester, the Grinch, is back there wearing his Wild West cowboy hat. Why? Because it’s been the wild, wild West around here with banks lately. Nod your head, if you know what I mean. Today, we’re discussing how annuity companies aren’t smarter than banks. They’re just more regulated. Let me tell you a little story.

A Messy Pandemic and the Resulting Inflation

A few years ago, there was a pandemic. Some say it came from a wet market where turtles were making out with bats, who were then loving on ducks and kissing snakes. I don’t know what was going on. Others say it came from a lab in China. Regardless, it was a mess. Can we agree? It was a mess for the world and for this country, too. Our politicians, from both sides, decided to print money to keep people home, to “keep the grease on the skids,” as they say, which ultimately caused inflation.

How the Fed Reacted: Rising Interest Rates

So, inflation took off and then Fed Chairman Powell and his friends at the big marble table, with donuts and bagels we pay for, raised interest rates drastically. What happened after that? Well, as you may know, or as I’m about to tell you, bond prices are like seesaws—when interest rates go up, bond prices go down, and vice versa.

Interest rates went up, bond prices went down, and some of those banks had to fire-sale bonds. This leaked out to the internet. With the world being 24/7 and social media, panic set in, and all hell broke loose. It got ugly. It got scary. And there was a run on the banks.

Banks Aren’t Always Managed Well

Now, of course, I don’t know all the details about the banks involved but based on what I’ve read from trusted news sources, it wasn’t managed well. Hindsight is always 20/20, but the bottom line is that there was a run on the banks, and there are still issues.

UBS and Credit Suisse: A Shotgun Wedding

One of my former employers, UBS, was forced to buy Credit Suisse. It wasn’t a voluntary deal; it was a shotgun wedding. I think the Grinch is making my nose itch again. They were forced into it, and now there are all kinds of things happening. When the government comes out and says, “All is well,” I think of the Animal House movie scene where someone is saying, “All is well,” while people trample them.

Annuities Aren’t Smarter Than Banks, But They’re More Regulated

Now, let’s get to the topic at hand. Annuities aren’t smarter than banks—they’re just more regulated. You may be asking, “What do you mean by that?” Let me explain. The good news is I broke it down in a high-level way in my Fun With Annuities podcast You can check it out on all major podcast platforms or watch the video on the Fun with Annuities YouTube channel.

I had John Lenzon, the “Annuity Architect,” with 40 years of experience in the annuity industry. We discussed banks versus annuity companies. I’m not saying one is better than the other, but annuity companies are more regulated, and they have measures in place to prevent a run on the company.

How Annuities Are Designed to Prevent Runs

Let’s take MYGAs, index annuities, variable annuities, and deferred annuities as examples. These products are held for a term, so there’s a surrender charge. If there’s a run on them, you’ll have to pay a surrender charge to get out. Many multi-year guaranteed annuities (MYGAs) also have market-value adjustments, meaning if you buy a MYGA and interest rates go up after the purchase, the sales charges will increase if you try to liquidate it.

The bottom line is that the annuity industry has put features in place to protect both the consumer and the industry. With banks, as you know, there’s a window, and you can say, “I want my money!” But with annuity companies, which are issued by life insurance companies, there’s no such window.

How Annuity Companies Handle Bonds

Remember how I talked about the banks having to sell bonds to hit their solvency ratios? Well, annuity companies buy the same investment-grade bonds—they just don’t have to sell them. They’ll hold them until maturity and collect the coupon payments. It’s really that simple.

Lifetime Income Products and No Runs

Let’s talk about lifetime income products. These include Single-Premium Immediate Annuities (SPIAs), Deferred-Income Annuities (DIAs), Qualified Longevity Annuity Contracts (QLACs), and income riders attached to index or variable annuities. These are the four main ways to get lifetime income contractually.

When you buy a SPIA, DIA, or QLAC, it’s irrevocable. You’re essentially “ripping the knob off a water faucet”—in this case, an income faucet. Income will flow as long as you’re breathing, and when you pass, 100% of unused funds go to the beneficiaries. There’s no run on that. You can’t say, “I want my lifetime income back!”

How the Annuity Industry Prevents Runs

The annuity industry’s product design prevents runs. It prevents panic, and it prevents people from trying to get their money out in a rush. That doesn’t mean annuities are smarter than banks. It just means that they’re not as vulnerable. They’re also not making car loans and doing risky things like banks. There are stringent rules for annuity companies to invest 100% or more of your money in investment-grade bonds from day one when you buy a Fixed Annuity.

What Happens If a Carrier Goes Out of Business?

Someone asked me, “What happens if an AA+ or AAA-rated carrier goes out of business?” Well, I’ll tell you what happens: you and I are fighting for bread at the grocery store. I’m going to win because I’ll kick you in the knee first, then punch you in the throat (don’t worry, just kidding) and take the bread. In other words, there’s no power. It’s anarchy. So, don’t even go down that rabbit hole. You can split it up under the state-guarantee fund rules if you want, but there’s no need to overcomplicate it.

Annuity Companies Stress Test to Prevent Disaster

Annuity companies are always running stress tests, what-if scenarios, and worst-case scenario analyses. They don’t wait for things to happen—they’re prepared. The bank situation that just happened? Yeah, that sent the actuaries at life insurance companies into a tizzy. But they quickly ran their calculations and ensured everything was in order.

Regulation and the NAIC

The annuity industry shows consumers that even if you hate all annuities, as the guy on TV says, you already own one—Social Security. If you say, “All annuities are expensive!” That’s a foolish statement. The rules that are in place to regulate annuity companies are strong, and the National Association of Insurance Commissioners (NAIC) ensures that each state’s commissioner oversees annuities and other financial products.

The Role of the NAIC and Future Oversight

If a company doesn’t follow the rules, the state guarantee fund absorbs the loss, or a larger company buys out the smaller one. This ensures confidence in the system. The recent banking issues will actually strengthen the NAIC’s oversight, ensuring that everything is in order for the annuity industry. With 11,000 Baby Boomers turning 65 every day, looking for guarantees and lifetime income, this is a good thing for the annuity industry.

I love this country. The scars from things like the recent banking crisis will make us stronger. We don’t sit back and moan. We learn from it, and that makes us better. That’s why we’re the United States of America, and I’m proud to be America’s Annuity Agent. My name is Stan The Annuity Man. See you next time!