03 Feb What’s the best way to identify a high quality annuity?

Q. What’s the best way to identify a high quality (AAA+ rating) simple immediate annuity. I’m looking for something of the highest quality, lowest cost, highest payout, etc. What questions should I ask? Then, I have read that it is better to pay a fiduciary financial advisor, on a fee-only basis, to find the highest quality immediate annuity deal, and that going straight to insurance companies could lead to greater fees charged than paying a flat fee to a fiduciary financial advisor to do the research. What is your take on this?
— Investor

A. Annuities can be complicated products.

We’re glad you’re asking all these questions.

The best way to determine the rating of an insurance company is to check their ratings with the major rating agencies in the U.S., said Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield.

These are A.M Best Company Inc., Moody’s Investor Services,  Standard & Poor’s Insurance Ratings Services, Fitch Ratings, and Kroll Bond Rating Agency.

Papetti said you can obtain the insurance company’s ratings through visiting each of the websites or by visiting the insurance company’s website under the “ratings” link, although the insurance company may list only the best rating received and not all of the ratings from the above agencies.

You can also visit the Insurance Information Institute website, which can assist in determining how to assess the financial strength of an insurance company, Papetti said.

Try this how-to from III here.

Papetti said only two insurance companies are AAA: Northwestern Mutual Life Insurance Company (Fitch AAA, Moody’s AAA), and New York Life Insurance Company (Fitch AAA, Moody’s AAA)

“While you may be surprised that there are only two insurance companies rated AAA, consider that there are only two companies in the S & P 500 stock index that are rated AAA: Johnson & Johnson and Microsoft,” Papetti said. “You may recall the U.S. Government lost its AAA rating on August 5, 2011 as Standard & Poor’s downgraded the United States to AA+.”

As for determining the best immediate annuity, you need to obtain not only the insurance company’s rating but the immediate annuity income and what benefits are available for surviving heirs, Papetti said.

“There are no explicit fees stated when obtaining an immediate annuity proposal as the insurance company’s expenses are factored into the annuity income that will be provided,” he said.

Most immediate annuities offer various payment options such as:

• Life Only: Payments will be made for the lifetime of the annuitant only. No benefit to surviving heirs.
• Life Only with a Cash Refund: Surviving heirs will receive no less than the amount invested in the immediate annuity, less payments the annuitant received during their life.
• Life with a Term Certain: Payments will be made for the lifetime of the annuitant with a minimum number of years that will be paid if the annuitant died prematurely.

Requesting quotes for those options are key questions to ask, Papetti said.

“It is wise that you are focused on the strength of the insurance company if you are considering an immediate annuity as you want to consider investing with an insurance company that will fulfill its obligation for the remainder of your life,” he said.

As for using a fiduciary, as we said, immediate annuities do not have stated fees because the insurance company’s expenses are factored in when they provide the amount of income they will pay the annuitant, Papetti said.

“I would not be concerned with fees but maximizing the income as well as what benefit is remaining for surviving heirs,” he said.

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This story was originally published on Feb. 3, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.