guaranteed results? ;)
Annuity companies promise- even guarantee- that they will give you reliable, solid returns no matter what happens to the
value of your investment. Say you invest $100,000 with an annuity company, and then the underlying investment value soon doubles. The annuity company may guarantee that your returns will remain at that doubled level for the rest of your life- even if the value of the underlying investment collapses!
How can they make such a promise? That part is very easy! The more interesting question is how can they keep such a promise….
In the last few years, more people (and annuity companies) are questioning whether or not they can keep more of those promises at all. Some annuity companies have significantly scaled back the promises they offer in new annuity contracts- after witnessing the challenges posed by their existing contracts during the investment market developments of 2007 and 2008 [http://www.kiplinger.com/features/archives/2009/04/krr_annuities_with_guaranteed_benefits.html].
More companies like AIG may eventually collapse under the weight of any promises that prove implausible- breaking not only those promises, but breaking every other promise the company has made. By making speculative promises (annuity guarantees) that they may have little capacity to fulfill, some insurance companies may be making a desperate “all or nothing” gamble to attract new investors to finance their previously overly-optimistic promises. Does that sound familiar?
So, would you lend a lot of money (say, $100,000) to someone without asking them a few questions about their finances? When someone purchases an annuity contract, that is basically like any other loan except that the promise to re-pay is far more complicated than in most loans. How much do annuity investors know about the companies to whom they are lending? How well do they understand the contracts they are purchasing? How well do the commission-hungry insurance salespeople even understand those contracts?
Many insurance companies have been shrinking in the last few years. Like any real estate investor who “maxes out” their credit cards after over-extending themselves by buying an overpriced home that they could not really even afford if it was not overpriced, some struggling insurance companies may have been more aggressive than ever in finding clever ways to attract new business (access new loans from investors). Companies offered historic commissions to their salespeople for the products that were most favorable to the company. Naturally, when a company realizes that they may go out of business without some aggressive innovations, they may be suddenly motivated to offer more complex and more optimistic promises- just like a politician who is losing support fast as election day approaches.
However, when a distressed borrower maxes out their credit cards to avoid defaulting on a mortgage, that actually does not make them a better risk for any new debt- but worse. Similarly, as annuity companies made more and more extreme offers to attract new business, then the more debt the companies compound with new extreme promises, the less valuable is any individual promise of that company. Distressed companies tend to attempt the same things that many distressed borrowers attempt- close the eyes tightly and speed up… or, in other words, borrow more aggressively and hope that external circumstances miraculously rescue investors from the recent natural results of their prior investments.
But can an insurance company really fail- like seriously? Well, how about the recent failure of giant US insurance company AIG, a global leader in the insurance industry?
Note that when financial contracts are guaranteed by a government program- such as during the USsavings and loan crisis in the 1980s- even the government guarantee program can also fail, as it did in the 1980s. Governments who over-
extend promises not only cannot keep them, but may even collapse under the weight of unfulfilled hopes. Consider how quickly the public credibility of U.S. President George W. Bush went from a widespread sense of confidence and even heroism… to such historic humiliation that Bush was nearly invisible during the 2008 Presidential campaign.
When I first recognized in 2002 the probable future of the US and global economy, I specifically predicted that President Bush would be made a “scapegoat” for the sudden appearance of issues that were decades (or more) in the making. We might as well allege that he is to blame even for the S&L Crisis of the 1980s or the Great Depressions of the 1930s or 1720s. Such castings of blame would be no more useful than blaming an isolated real estate speculator, or an isolated realtor, or an isolated financial business.
People who invested in ways that got them the exact results they got can toss around blame for all the reasons they can
Specifically, people who lend money to annuity companies based on ridiculous promises of solid returns “no matter what happens to the value of your investment” may wish to review the meaning of the words “the value of your investment.” Maybe the insurance companies should not have done what they may have done… and this or that investor should not have done whatever she may have done… and this or that politician should not have done whatever he may have claimed to have done. So what?
If you or people you care about have invested in over-extended promises of annuity contracts or any other feature of the great Ponzi economy of speculative financial bubbles, will blame alter your future or your past? However we learn is however we learn. If you are committed to being confident in the future results of the investments you make, you may engage in a conversation that fulfills that commitment with whomever you deem fit to participate with you in that conversation.
Everyone else may argue over who is most to blame for the next sudden disappearing of real estate equity, disappearing job markets, disappearing insurance companies, and disappearing government budgets and programs. How ironic is it that those who actively participated in those developments may be the most motivated to name scapegoats, to dodge responsibility for the exact results produced by their own participation?
I have entered contractual promises that I kept. I have entered contractual promises that I broke. I have entered contracts that other people did not keep, but I chose to enter them, didn’t I? Live and learn!
- How to Buy An Annuity (learnbonds.com)
- Annuity Safety (learnbonds.com)
- What is an annuity? | LearnBonds.com (learnbonds.com)
- Insurers to ease pressure-selling of annuities (independent.co.uk)
- Article Title: Charitable Gift Annuities (marcodifloriofinancialservices.wordpress.com)
- Annuities: What you should know (thestreet.com)
- What happens if your insurance company fails? (cbsnews.com)
- Annuities in 401(k) Plans: 5 Concerns (money.usnews.com)
- Why Variable Annuities Have No Place in Your 401(k) Plan (forbes.com)