How to evaluate an annuity company, and what makes one risky

A framework, not a blacklist

The short answer: judge an annuity company on four things you can look up yourself — its financial strength rating, the contract's surrender schedule, its history of changing renewal rates or caps on contracts people already own, and its complaint record — and treat any agent unwilling to walk you through all four as the risk. We do not publish a list of companies to avoid. Insurance regulation restricts unsupported comparisons between carriers for good reason, and a list would tell you less than the method does, because the company that is wrong for one buyer is right for another.

1. Financial strength, because the guarantee is only a promise

Every guarantee in an annuity is the issuing insurer's promise, backed by its own reserves and claims-paying ability. Annuities are not bank deposits and are not FDIC insured. That makes the insurer's financial strength rating the first thing to check, especially for a contract meant to pay income twenty or thirty years from now. AM Best publishes ratings you can search at its rating centre; the scale runs from A++ and A+, which AM Best calls Superior, through A and A-, Excellent, and B++ and B+, Good, down to categories it classes as vulnerable. A rating is an opinion, not a guarantee, and it can change; look it up yourself rather than taking a brochure's word.

If an insurer does fail, state guaranty associations provide limited protection to policyholders of licensed insurers, up to limits set by state law. The California Department of Insurance's company and agent information pages explain how that works here. Limited is the operative word: it is a backstop, not a substitute for choosing a strong carrier.

2. The surrender schedule, which is where the real cost hides

Deferred annuities carry surrender charges on withdrawals above a contract's free amount, for a period of years that can be long. Ask for the schedule year by year, in writing, along with the free-withdrawal provision and whether a market value adjustment applies, which can increase or reduce an early withdrawal depending on how interest rates have moved. A contract with an attractive headline rate and a ten-year surrender period is not obviously better than one with a lower rate and a shorter one; it is a different trade. This is also the single most common thing that is glossed over in a sales conversation, which makes asking for it a useful test of the agent as well as the contract.

3. Renewal history, not the brochure number

For a fixed indexed annuity, the cap, participation rate or spread that limits your credited interest is set by the carrier and can be changed at renewal, within minimums stated in the contract. The number on the brochure applies to new business. What matters to you is what the company has done to the caps on contracts it already issued, because that is what your contract becomes in year two and beyond. Ask directly: what were the renewal caps on this product for existing contract holders over the past several years? A carrier that cannot or will not answer has told you something. For a multi-year guaranteed annuity the equivalent question is what the renewal rate looked like at the end of previous terms. Our fixed indexed annuity and MYGA pages explain how each of those mechanisms works.

4. Complaint records, which are public

The National Association of Insurance Commissioners publishes consumer information including complaint data by company, and California's Department of Insurance maintains its own company information and complaint process. Volume alone is not damning for a large insurer, but a pattern in a particular product line is worth asking about. While you are there, check the agent too: any California licence can be verified on the licence status lookup, including ours.

The questions that reveal the most

1. What is this carrier's current AM Best rating, and what was it five years ago?
2. What is the surrender charge in each year, what is the free withdrawal amount, and is there a market value adjustment?
3. For an indexed contract: what are the current cap, participation rate and spread, what are the contractual minimums, and what have renewals looked like for existing holders?
4. What does this contract look like against simply leaving the money where it is, on the same page?

We answer all five in writing before anything is signed; our page covers the last one in full, and the carriers we are appointed with, with their ratings, are on our carriers page.

Warning signs that have nothing to do with the company

Neutral background worth reading before you buy from anyone: the California Department of Insurance's guide Annuities: What Seniors Need to Know and FINRA's annuities overview.

Questions people ask

Reviewed by Roberto Morales, California Insurance License #0G97165. Next Wave Options is licensed for life and annuity products only and does not provide investment, tax or legal advice.