Are Annuities FDIC Insured?

Annuities are products issued by life insurance companies to help buyers grow, then distribute money in retirement. Annuities are not insured by the Federal Deposit Insurance Corporation (FDIC) because they are not bank products. Instead, they’re backed by the financial strength of the insurer.

Annuities are not considered bank deposits like checking and savings accounts and do not fall under the protection of the FDIC.

The safety and guarantees of annuities are backed by the financial strength and claims-paying ability of the issuing insurance company. Ratings are one way to check the fincanial strength of an insurance comany, these are provided by third party organizations like AM Best, Standard & Poors, and Moody's.

Generally speaking, it is a good idea to do business with insurance companies that are rated "good" or better by these agencies.

Does That Mean Annuities are Riskier than Other Retirement Products?

No! In fact, annuities can actually take the risk out of retirement.

When used properly, annuities offer your retirement plan something no other retirement product on the market can: guaranteed lifetime income.

Unlike 401k plans, mutual funds, stocks, and bonds, annuities are insurance products that can help you safely accumulate money prior to retirement. Then, they can provide you with guaranteed income in retirement for a period of time of your choosing — even for life!

Another group of entities that helps reduce risk for consumers looking to purchase annuities are state insurance departments. The insurance companies that issue annuity contracts are overseen by these government organizations.

Before being granted a license to sell annuities, an insurance company has to comply with strict requirements regarding capital, surplus, and finances. This helps ensure that member life insurance companies can meet their financial obligations.

What Protections Do Annuities Have?

As we discussed, to ensure peace of mind when buying an annuity, it's a good idea to research the claims paying ability of the insurer. This ability is indicated by ratings of the rating agencies mentioned above.

But there is another "backstop" known as a state guarantee association.

The primary purpose of guarantee associations is to provide a safety net for annuity and life insurance policyholders by offering protection against the failure of insurance companies. If an insurance company that issues annuities becomes financially insolvent, the guarantee association steps in to provide coverage for certain policy benefits.

The specific coverage and limits offered by annuity guarantee associations vary by state, as each association is governed by the laws of the state in which it operates.

But remember that you should make your buying decision not on guarantee association protections but on your belief that the insurer has the financial strength to fulfill their obligations to pay.

What are the Risks of Buying an Annuity?

The financial strength of the insurance company helps protect buyers of all types of annuities, whether you buy a fixed, fixed-indexed or variable annuity.

But the most volatile annuity, variable annuities, comes with an added layer of risk and additional regulatory oversight.

A variable annuity works like a mutual fund. Your premiums are invested in subaccounts that affect your annuity’s rate of return. If these subaccounts perform well, you’ll see a high return. If they don’t, you’ll see a low return or a negative return.

And variable annuities don't come with any guarantees.

Because market volatility affects the value of a variable annuity, it is the riskiest of the three types. Because variable annuities are considered securities, they are regulated by the SEC and FINRA, federal government regulatory organizations.

Fixed annuities and fixed-indexed annuities present less risk to buyers because both of these annuity types have guarantees in place that ensure that your principal is safe.

The safest type, fixed annuities, are the least risky annuity product. Fixed annuities can provide a safe foundation for your retirement portfolio. Insurance companies present you with a guaranteed rate of return, which remains the same no matter what happens in the market. Unless you break your contract, your money will continue to grow at your fixed interest rate for the length of the guarantee term you choose.

Doing Your Due Diligence with Annuities

Buying the right annuity can depend on several factors, including your age, risk tolerance, and the current mix of products in your retirement portfolio, among other factors.

For instance, if you are currently working and are looking to accumulate money before you retire, you might choose an annuity that helps build assets prior to retirement.

These are called deferred annuities. But if you are close to, or in, retirement and want to create a solid foundation of income to complement other investments, then you may want to choose an annuity that helps you create a personal pension. These are known as immediate or income annuities.

Other factors to consider when doing your research include:

• Death benefits: You may wish to choose an annuity with built-in death benefits or a death benefit rider if you want to leave a legacy to a loved one or organization.
• Return of premium benefit: Some annuities offer a return of premium benefit. This lets you surrender your annuity and receive your initial premium back without penalties.
• Surrender charges: If you make early withdrawals, annuity companies often levy a penalty called a surrender charge. Your annuity contract will specify the surrender charge period and percentages.

Final Thoughts

As you navigate the world of retirement planning, it is important to know the benefits and possible risks of each product you choose to support your plan.

There a many reasons to buy an annuity, with guaranteed lifetime income being the most impressive. One of the most conservative annuities is the fixed variety. Canvas Annuity offers fixed annuities with a twist — very competitive rates and the ability to buy online in minutes. And annuities from Canvas are backed by a "good" financial strength rating from AM Best, one of the primary insurance rating agencies.

Check out the current annuity rates here.