Question:
Dear Dr. Don,
I'm considering an immediate annuity, and I'll invest $100,000 to earn a decent rate of return. I'm currently retired and need the monthly returns to live on.
How safe is an immediate annuity? In other words, can I trust that whichever insurance company I place the money with will deliver that money each month, or is there considerable risk that the insurance company will default or go belly up? In that case, I assume I would lose my entire principal of $100,000.
-- James Judicious
Answer:
Dear James,
An annuity is as safe as the insurance company backing it. That's why you want to consider the risk ratings of the annuity provider as part of the due diligence surrounding the investment decision. The likelihood of you losing your entire principal is pretty remote if you do your homework before signing the annuity contract.
Part of that homework is looking into the financial strength of the annuity provider. A.M. Best ratings for insurance companies place firms in three "group" categories: secure, vulnerable or not rated. Secure group ratings can vary from superior to excellent to good. I'm a conservative guy, so I'd want a secure firm with a superior rating. The firms with excellent ratings will tell you there's not enough difference between the superior and excellent ratings to justify crossing the excellent firms off your list. You'll have to decide that for yourself.
