Annuity Guarantees and Trusting Insurance Companies

Hartford Financial is seeking ways to lower its exposure on some annuity contracts it sold. Stories like this make people wonder if they can trust insurance companies and believe the annuity guarantees. I believe most insurance companies are very trustworthy and the income guarantees are good, but consumers need to be careful.

Insurance is the bedrock of people’s financial plans; it helps to avoid financial disaster in car accidents, home damage or theft. Insurance companies are there if a family’s breadwinner dies or becomes disabled. These companies have done a great job of insuring business property and employee’s health. Policies help prevent financial disaster if businesses are interrupted because of fire, or the death of owners or key employees. With all of the bad press insurance companies get, in general they do a commendable job of pooling and transferring risk. However, when a few insurance companies do things that are disadvantageous to consumers, we should take notice and learn from it. Case in point–Hartford Financial, which I will discuss more later in this article.

When I sold insurance products for 12 years back in the 80’s and early 90’s, it was extremely difficult to combat competition. Why, you might ask, wasn’t I good at selling?  I never made million-dollar round table, the ultimate sign of success in the insurance business. However, we somehow managed to support a family of 4 in a nice neighborhood for a dozen years on straight commission. We were never late on mortgage payments, tithed 10%, and took some nice vacations.  We always employed a needs-based approach to selling insurance, annuities and mutual funds. Early in the morning I’d arrive to study for the professional designations I later earned: ChFC- Chartered Financial Consultant, and CLU- Chartered Life Underwriter, and I’d come home late at night after appointments. My knowledge and skills helped me have few complaints, and I was able to retain more than 90% of my clients.

Competition was fierce. I’d try to sell products to people who were shown something better from another company. It was very difficult to convince clients that my product was better even when mine paid an interest rate that was lower, had a higher premium, or did not have as fancy design features as others did. I told prospective clients that, yes, my product didn’t ‘look’ as good, but it was good and my company would be around. They didn’t understand when I explained that the other company was taking on more risk when it made bigger promises. As I look back, the companies I represented are still around, and many of the ones making big promises back then have folded, have been sold, or are now going through what Hartford Financial is. Hartford is now attempting to relieve itself from the risk it has from the annuity guarantees it can’t support any more in some of its annuities.

Don’t get me wrong, I like annuities, for the right person for the right reasons. They offer nice tax deferment, and some guarantees on income and death that mutual funds cannot. The charges can be expensive, but you get what you pay for if you value those things. On the other hand, you have to wonder if you can trust the insurance companies offering those guaranteed benefits, since purchasing an annuity is a long-term venture.

Times haven’t changed. About 10 years ago the universal life industry blew up, and many people ended up with worthless contracts or were forced to pay very high increased premiums. Some of the very companies I was trying to compete against experienced these problems. Today Hartford Financial is trying to get out of having to live up to the promises they made to customers. They sold annuities with really good guarantees, but now they are faced with the fact that they don’t have enough assets to remain as financially solid if they don’t come up with a way to lower their risk. Read the article in the Wall Street Journal. They are applying to regulators to be able to offer clients cash if they trade in their income guarantees.

It has been said that you never shop for the lowest-cost parachutes and surgery, so you shouldn’t shop for the lowest-cost insurance. When you buy a product of any type from an insurance company, you have to ask yourself if you can trust the company. Do the rating agencies like AM Best, Duff and Phelps, Moody’s, Fitch, and Standard & Poor’s rate them well for financial stability? When looking for insurance, price is surely important, but trust is also an important factor. Will the insurance company be able deliver on promises, including keeping the client’s cost down for the long haul? I ask myself if they are trying to attract me with the best features and lowest cost. Those are the ones I stay away from.  They can usually do that only if they are taking more than average risk, or if they are doing it at a disadvantage to existing policy owners.

When Hartford was selling these very competitive insurance and annuity contracts, they had a great story, great ratings, and well trained, great wholesalers. Often they led the industry on sales, partly because their contract designs were very aggressive, and at times their internal charges were very competitive. We can learn from this. If we are considering an insurance product, we have to ask how are they rated and whether they have a history of always treating both new and old customers well. Are they offering the best and most competitive contract features in the market, or are they too good to be true? These considerations should give you some clues about which companies you can trust.

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