Being Insured

• When people think about protecting their assets, the first thing they think of is FDIC insurance on their money. FDIC (Federal Depository Insurance Corp.) is an insurance company backed by the U.S. government to protect assets up to $250,000 per beneficiary.
  
  Annuities are not FDIC insured. However, annuities are offered by insurance companies. Therefore, if you own a fixed annuity that is not tied to stock market fluctuations, then your money is guaranteed and protected by the assets held by the insurance company. Putting it in perspective, you trust the company that insures your home in case of fire or your car in the event of an accident. You don't require the government to insure it.
  
  

Fixed Annuity

• Fixed annuities offer a fixed rate of return for a fixed period of time. They resemble bank time certificates in how they work. You place your money in for a specified term and the money gains the agreed-upon return. If you pull out the money before the term, you will be assessed a penalty called a surrender charge. This surrender charge decreases over time. Unlike time certificates, which are generally held for a shorter period of time, fixed annuities have terms ranging from three to nine years. The rate is usually guaranteed for a year, and it's renewed at current rates at the anniversary period. There is usually a minimum guaranteed rate of return.
  
  

Varaible Annuities

• Variable annuities are unlike fixed annuities. While they offer the same tax benefits as fixed annuities and have the capability to be annuitized for a lifetime income stream, they are tied into variable equities. These equities are offered in the form of mutual fund subaccounts. A variable annuity may have 10 to 50 subaccounts or more to give annuity owners the ability to choose an investment portfolio that meets their risk tolerance and investment objectives. The subaccounts may be bond funds or various stock portfolios. There is often a money market subaccount to place money in down markets. Some variable annuities offer a fixed option subject to the terms of the contract.
  
  

Insurance Company Ratings

• When you consider an annuity, you must consider if it is fixed or variable. As discussed, fixed accounts are consistent and safe. Variable accounts depend on the subaccounts the money is invested in. Beyond this, you need to consider how large the company is and what it is rated. Insurance companies are monitored and rated based on their financial solvency---how much cash they keep in reserves in case there is a high claim demand. Standard & Poor's and Moody's are two companies that offer ratings on insurance companies. Look for companies that have a AA or AAA rating to feel secure that the company has lots of assets to cover your investment.
  
  

Government vs. Private Insurance

• While the FDIC has become the measure of asset security since the Great Depression, insurance companies have been insuring money for centuries. One must consider whether relying on government is better than private industry. At the end of the day this is a personal choice as to what makes you feel most comfortable with your money. In the worst-case scenario, large private insurance companies may become insolvent just as banks may fall into financial distress. On the same token, the FDIC is an insurance company and there is nothing guaranteeing that it will always be able to maintain financial solvency if there was a major economic crisis.