What Happens to an Annuity if the Stock Market Crashes? (TAM Classic)

Hi there. Stan The Annuity Man, America's annuity agent, licensed in all 50 states. I'm so glad that you joined me for this blog. This is another one of those blogs where someone put a question on one of my videos. If you watch any of my videos, you can put in questions, submit a question, or comment. And there are times I look at that and go, that's fantastic. That's a great question, and I'm going to put it on the YouTube channel for infinity, evergreen content so this person and their question will live in infamy for the rest of time as the Stan The Annuity Man YouTube channel grows and grows and grows and grows to infinite levels and popularity.

The person's name that submitted the question is Nicky Name, and I love that name. Nicky Name. I want to change my name to Nicky Name. That's awesome. The question is, what happens to an annuity if the stock market crashes? And Nicky had a lot more questions to follow up. I answered all of them, and I'm going to answer them again on this blog. I can only imagine how excited you are to hear the questions and the answers, so let's dive in.

Fixed Index Annuities

So, are Fixed Index Annuities good against a stock market crash? What if the insurance company backing it goes under? What's your protection? Let's take them one at a time. FIAs, Fixed Index Annuities, are CD products. They were introduced in 1995 to protect you and your principal from any market loss. So, yes, it's a Fixed Annuity. It's not a security. Regardless of what you hear out there, it's not a market return product.

Fixed Index Annuities are CD-type products, normal CD returns. They do protect your principal if you attach an Income Rider to it. If you do that, then there are fees for the Income Rider. But if the market goes in the toilet, you won't lose any money, which is a good thing for Index Annuities.

The second question, what happens if the insurance company backing that Index Annuity goes under? That's a good question. Now, with CDs and things like that, you're backed by FDIC Insurance. It's the best coverage you can get. The annuity industry has nothing to compare to that. Let's be very clear. Each state for Fixed Annuities, in this case, Fixed Index Annuities, falls under that Fixed Annuity category.

State Guaranty Fund

A state guaranty fund backs up the policy to a specific dollar amount, and every state differs. The site is NOLHGA.com. You can pull it up and look at your state's coverage limits. But I encourage you not to put a lot of weight on that. What I want you to do is understand that when you buy an annuity of any type, you just can't say, I hate all annuities. No, there are many types of annuities. They all do different things. They all have different benefit propositions and limitations, etc. But base your decision on the Claims-Paying Ability of the carrier, period.

Annuity Companies Aren't Smarter Than Banks

Now, annuity companies aren't smarter than banks. In my opinion, they're more regulated than banks. With Fixed Annuities, they have to keep a hundred percent of your money on hand, day one, liquid and investment- grade bonds. You can go down the rabbit hole if you want to argue about investment-grade bonds. But that's as good as it gets. So, look at the Claims-Paying Ability of the carrier.

Rating Services

There are four major rating services: Standard and Poor's, Moody's, A.M. Best, and Fitch. We also have a COMDEX score that's not perfect. But it also is a way for us to track the stability and financial security of that company that's issuing the policy, because you buy an annuity for what it will do, not what it might do. The will-do is the contractual guarantee. You're going to get a contract in the mail. It's called a policy, but it's a contract. So, you buy it for the contractual guarantees and to ensure that the company can back up the claims. I can do that for you. I can help with that recommendation with my background with Dean Witter, Paine Webber, Morgan Stanley, and UBS. I know how to look at bond holdings, solvency ratios, etc. And I'll tell you if you don't need to be there with that company.

Self-Regulating

The other thing you should keep in mind from a safety standpoint is that the annuity industry does a very good job of self-regulating. I call it the annuity mafia, but the big guys oversee the little guys because, remember, annuities, regardless of the type, they're confidence products. The annuity industry knows that they cannot cause consumers to lose confidence in these transfer risk contractual guarantees. So, we see a lot of consolidation in the annuity industry. But the bottom line is I will work with you to ensure we're choosing the right company. I represent pretty much every carrier out there, all the ones you've heard of and all the ones you haven't. So, that's the answer to that question.

Annuity Options

Okay, a couple more. Very good questions from Nicky Name. Here's one of them: What if you don't care or want an Income Rider attached but just want to protect the money against market crashes? Then, an Index Annuity could work. Also, a Multi-Year Guarantee Annuity, and a Fixed-Rate Annuity would also work. Both MYGAs, M-Y-G-A, Multi-Year Guarantee Annuity, and FIA, Fixed Index Annuities, are Fixed Annuities and protect from market crashes. The other question that Nicky had was asking about the liquidity of an indexed annuity. Most Indexed Annuities, the vast majority, allow you to take out 10% percent penalty-free on an annual basis.

They're not all like that, but the vast majority are like that, meaning that if you put a hundred thousand dollars in and you said, "Okay, Stan, I'm in month 12 or whatever. How much money can I get out penalty-free?" It'd be 10 percent of whatever that accumulation value would be. Remember, with Indexed Annuities, if you have an Income Rider, draw a line down the middle of the page. Index option side on the left, Income Rider on the right. The liquidity is based upon the index option side, and you typically can take out 10 percent penalty-free.

Nicky's questions were really good, but I took a little bit of extra time because I care. I care about you guys out there, and I want to make sure that you fully understand this annuity world because it's convoluted, and there are a lot of salespeople out there, and I call them shucksters, but they're shysters and hucksters. And a shuckster, by the way, is someone who shucks oysters at an oyster bar. Just if you want to write that down. But here are the questions that I came up with.

Conclusion

Are annuities safe in a market crash, and does the stock market affect annuities? Yes, Indexed Annuities, and this is what Nicky's talked about, are safe from a market crash. They're Fixed Annuities. They're not securities. They're Fixed Annuities issued at the state level. And the second question, does the stock market affect Indexed Annuities? On the downside, no, you won't lose any money. But remember the index option side. Now, this is the part where the salespeople out there have a tendency to push the truth a little bit too far.

Just remember this: Fixed Index Annuities were designed in 1995 to compete with normal CD rates. It's not a market product. And if you bought one and think it is, it's not. It's a principal protection product where you'll get normal CD-type returns. So, Nicky Name, home run, if you're a baseball player. I'm telling you right now, those were good questions. I appreciate you putting them in the comment spot. Hey, thanks for joining me today. I will see you next time.

Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.