Across America, defined benefit pension plans continue to be replaced by retirement savings arrangements like the 401(k). With the U.S. Congress passing the SECURE Act last year, more folks will be saving in 401(k) plans. When coupled with an annuity, 401(k) savings can provide meaningful pension-like secure income throughout retirement.
Annuities are the only financial product in the marketplace that offers guaranteed income for life. Like Social Security, retirees with annuities receive a check each month regardless of market conditions or how long they live. Annuities can also provide income to a surviving life partner.
Life insurers are the only financial institutions that offer annuities. They do this through careful investing and pooling mortality risk.
With pooling, annuitants who die before their “life expectancy” help fund the cost of benefits to those that live longer. The average life expectancy for a 65-year-old woman is 20.5 years; for a 65-year-old man it’s 17.9 years.
State insurance departments monitor life insurers. To ensure annuity payments are made, states have adopted uniform solvency rules that are unique to the life insurance industry. Life insurers must hold assets equal to their financial commitments or “liabilities.” Also, life insurers must have additional assets or “capital” set aside as a cushion to cover unexpected events. The rules demand insurers hold even more capital when their investment portfolio is exposed to more risk.
Under these rules, it is not uncommon for a life insurer to have $1.10 in assets for every $1.00 of liability to the annuity contract holder. Regulations governing pensions allow them to hold much less than $1.00 for each $1.00 due. Unfortunately, many pension plan sponsors have taken advantage of this, leaving many plans severely underfunded.
While rare, should an insurer fail to meet solvency requirements, state regulators will intervene. If the state insurance department is unable to rehabilitate the insurer, state guaranty associations ensure annuity payments continue – at least up to the state’s specified coverage limits, which in most states is $250,000.
Retirement savers can rest assured that their annuities are safe – for life.
Jim Szostek is Vice President & Deputy, Retirement Security at the American Council of Life Insurers (ACLI). He helps guide ACLI policy on legislation and regulations affecting the U.S. retirement system. Prior to joining ACLI in 2008, he held positions at CIGNA and The Hartford.
