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 though, 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; helping 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 due to 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 get to more of in a few paragraphs.

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 an 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 come home late at night after appointments. My knowledge and skills helped me have few complaints, and retain over 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 not as fancy design features. I told prospective clients that yes my product didn’t ‘look’ as good, but it was good and my company will 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, been sold, or 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. However 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 faced to pay very high increased premiums. Some of the very companies I was trying to compete against. Today Hartford Financial is trying to get out of having to live up the promises they made to customers. They sold annuities with really good guarantees, but now are faced with the fact they don’t have enough assets to remain as financially solid if they don’t come up with a way 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, you never shop for the lowest cost parachutes and surgery, so you shouldn’t with insurance. When you buy a product of any type from an insurance company, you have to ask yourself if you can trust them. 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 up there. Will the the insurance company be able deliver on promises, including keeping my 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 only usually do that if they are taking more than average risk, or doing it at the 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, do they have a history of always treating customers well- both new and old ones? Are they offering the best and most competitive contract features in the market, are they too good to be true? These things should give you some clues about who you can trust.