Life Insurers and Long Distance Relationships
October 4, 2011 by Wendy C. Waugaman
By Wendy C. Waugaman
Published September 29, 2011
| Retirement Miracle
You have known your family insurance agent a long time. He has helped you with your insurance needs for years, understands your family and your financial situation. He has always done a good job for you. You like him, and not just that, you trust him. Now your entering retirement and he suggested a long term, deferred annuity. You like the idea of safety of principal, annual interest credits, minimum guarantees and lifetime income.
“Sleep insurance” has a nice ring to it. Your agent is suggesting that you look at a couple of different life insurance companies that specialize in annuities, one based in Iowa, of all places
How do you know you can trust that company to manage your money carefully and treat you right on rates? More importantly, how do you know that company will be around for the next 10, 20 or even 30 years? Good questions: life insurance is indeed a long term, long distance relationship.
The fact is, for starters, that life insurance is one of the most highly regulated industries in the world. In the United States, insurance companies are regulated primarily by state insurance departments. This provides for localized oversight of the industry, and a place close to home you can go to with question or concerns. State insurance regulators supervise virtually every aspect of a life insurer’s business, including, to name just a few:
• Regulations of the types of investments insurers can make with your premium deposits. In general, investment must be predominantly in fixed income securities such as bonds, with limited exposure to equity securities and derivatives.
• Regulation of “risked-based capital” as a financial cushion to protect policyholders against losses an insurer may incur on its investments. The riskier the asset a company buys, the more capital it must have to protect against loss.
• Regulation of policy “reserves”. This is the amount the insurer must hold to back its commitments to its policyholders to provide all the benefits provided by its annuity and life insurance products.
• Regular, comprehensive financial examinations by the insurer’s home state insurance department as well as market conduct exams in its home state and other states where it does business.
• Oversight of sales practices including requirements for suitability reviews, free look periods, annuity disclosure requirements, advertising, unfair trade practices, and agent licensing and training. In addition, insurance laws in every state govern minimum product guarantees such as cash surrender values and minimum guaranteed interest rates.
• State guaranty funds provide an extra layer of protection against insurance company insolvency by providing coverage for annuity and life insurance values up to certain limits established by state law.
So as you can see, insurance companies have very little “wriggle room” to take unnecessary risks with your money. There are a few things in the insurer’s discretion, and those you should pay attention to. Rate setting for one. This is the annual rate of interest, above the minimum guaranteed rate, the insurer may declare on fixed rate annuities, or the upper limits, known as “caps” or “participation rates”, on fixed indexed annuities. Insurers typically declare this rate annually as of the anniversary date of your policy. Their decision will be based on several factors, of which the most important generally are the performance of their invested assets, current yields available on new investments and the cost factors of running their business. At American Equity we believe in offering fair and consistent renewal rates on policy anniversary dates — and we publish our rate history on our website. When considering the purchase of a life insurance product, be sure to ask your agent about renewal rates and check the insurer’s website. If they don’t publish that information, ask why.
Last but not least, insurers have the ability to offer you great service in administering your policy, or the service level can be far below your expectations. Have you ever called an insurance company only to be put on terminal hold, or, worse yet, lost in a maze of “automatic phone attendants” and voice mail?
At American Equity we pride ourselves on having the best service in the business, and that starts with answering your calls and meeting your needs in a friendly, prompt and courteous manner. Trust those companies who treat you with fairness, consistency and respect. That is our goal at American Equity, because it is what you deserve when you entrust us with a portion of your retirement savings.