People buy annuities for many reasons, from market protection to guaranteed income payouts. After all, an annuity is the only instrument capable of paying a guaranteed income for life. But who guarantees annuities? What sort of safeguards stand behind those guarantees?
The annuity guarantor is, of course, the life insurance company issuing the contract.
By law, life insurance companies must maintain very strict capital reserves for every dollar of fixed annuity premium. State regulators require annuity insurers to keep dollar-for-dollar reserves in coverage for every dollar of fixed annuity premium they hold.
Many life insurance companies hold reserves above this. For example, some insurers have $1.08 in reserve capital for every annuity premium dollar.
Hence, this is what financial pundits mean when they say that a life insurer's ability to make good on their annuity promises depend on that company's financial strength and claims-paying ability.
What about other safeguards if an insurance company has a liquidity problem? There are also other measures that state insurance regulators put in place as a financial safety net.
Let's get more into the details of how insurance companies' financial strength are monitored. We will also cover some of these other safety net features that help back up fixed annuity guarantees to policyholders.
