Insurers as Providers of Fixed Income Investments

Insurers as Providers of Fixed Income Investments

Guaranteed Income Contracts (GICs)

What are fixed annuities and are they good investments?

Guaranteed Income Contracts (GICs)

Similar to bank certificates of deposits, only offered by insurance companies

Offer a guaranteed rate of return for a certain amount of time

Generally invest in a pool of bonds, real estate and perhaps stocks

The "guarantee" is the interest rate you'll earn

But this guarantee is usually not backed up by a third party

GICs are not insured against loss in principal

GICs are quite often seen in 401(k) and other retirement plans

Check on the financial health of the insurance company before you invest in a GIC

What you want to avoid

In the late 1980s Executive Life attracted numerous investors with high yielding products

But the firm used junk bonds to provide those enticing yields

Executive Life eventually filed for bankruptcy

What are fixed annuities and are they good investments?

Fixed annuities are contractual instruments offered by insurance companies

Offer a fixed rate of return on the investment

In contrast to variable annuities offered by insurance companies

Allow your earnings to grow on a tax-deferred basis

You can not withdraw your money without penalty before you reach age 59.5

Watch out for an initial teaser rate which attracts in investors

See how long the teaser rate is guaranteed

See what the minimum rate you might earn is

Also try to avoid surrender fees

These are fees charged against your principal if you withdraw from the annuity early

A typical surrender fee is 7 percent in the first year, declining to 1 percent in the seventh year

If you don't like your current annuity, you can switch the money in another fixed or variable annuity by making a penalty-free 1035 exchange

Section 1035 is the relevant part of the tax code

You will probably have to pay surrender fees to switch to a new company

Usually not as good as investing through a 401(k), IRA or other retirement account

Initial investment is an after-tax investment (no immediate savings in taxes)

Commissions and fees tend to be higher on annuities than with mutual funds inside a retirement account

Check on the financial health of the insurance company before you invest in a GIC

With a fixed annuity, you're a general creditor of the insurance company

If the insurer fails, you may not get all of your investment back

In contrast, variable annuity holders are not creditors of the insurance company

Securities held for variable annuities are held by a third-party custodian