Inside Credit Ratings

Summary

When you pay an insurance company for an annuity, you’re essentially purchasing their promise to give you a lifetime income. The idea of the insurance company failing to follow through on their promise is a scary one to think about, so it’s important to take precautionary steps to protect yourself before making your purchase.

One step to take? Look into the insurance company’s credit rating. A credit rating is a measure of the company’s ability to repay its creditors, which includes you, once you purchase an annuity from the company. In other words, it’s a quick way to assess the credibility of an insurer’s promise to pay you for life.

When it comes to credit ratings, there’s often a tradeoff to be made. Usually, though not always, an annuity with a higher payout has higher credit risk, meaning the insurance company backing the annuity has a lower credit rating. The question then, for you, is whether or not you’re willing to take on a greater risk for a greater payout. Unfortunately, there’s no easy answer to this question. It depends on each individual situation. But there’s one thing that is universal: guaranteed lifetime income is a long-term bet.

As with anything, credit ratings aren’t perfect. There are two main obstacles. First of all, credit ratings are paid for by the very company that’s being rated. Needless to say this presents a potential conflict of interest. There have been talks about getting away from what’s called an “Issuer-Pay” model, but it’s unlikely that’ll change soon. The second issue stems from times of market stress. During these times, credit rating agencies struggle to keep up with the wealth of new data entering the market. Think 2008. Credit ratings were slow to adjust to the rapidly changing reality on the ground.

With all the products in the market and the market imperfections, how can you make sure you’re making the best choice for you? Well at Abaris, we only sell products backed by insurance companies in the top quartile of credit ratings (based on the Comdex Index). The cut-off quality that the Abaris platform uses is above and beyond that of what rating agencies consider the minimum for investment grade credit. As we said before, nothing is perfect and nothing is for sure, but holding this high standard of credit quality makes it a lot less likely that you’ll run into trouble with your insurance company.

Beyond using our platform to make sure you’re dealing with only the most credible companies, there are five things to keep in mind when comparing annuities on the market.

  1. An insurer's creditworthiness should play a major role in your annuity purchase decision
  2. Credit ratings are a quick, shorthand way of assessing an insurer’s creditworthiness
  3. The two most widely used credit rating agencies in the insurance industry are A.M. Best and Standard & Poors (S&P)
  4. Abaris only carries insurers with top quartile credit ratings, so you know you’re setting yourself up to deal with only the most credible insurance companies
  5. Never let anyone tell you that credit ratings don’t matter! Some advisors say that, even if your insurer goes bankrupt, your annuity will get paid out. This is possible, but it’s far from guaranteed. They’ll also tell you that annuities are FDIC insured. This is just simply not true.

Annuities can seem confusing, but Abaris is here to help you take all the right steps to a happy retirement.

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