With more investors anxious about protecting their nest eggs and concerned about outliving their money, fixed annuities have seen a major surge in popularity; sales in 2009 reached $108 billion, up 48 percent over 2007 levels. But with much of the business dominated by insurance agents and financial planners, it s notoriously difficult to comparison-shop. So we asked the top 20 sellers of fixed annuities to provide us with quotes for a 65-year-old man who wanted to take a $300,000 lump sum and turn it into an annuitized retirement income.
To determine our rankings, we used formulas that combined the size of the payment the company offered, the amount it charged customers for benefits like an inflation adjustment or a chance to pass money on to survivors, and the company s overall financial strength as measured by insurance rating company A.M. Best.
Four of the top 20 companies declined to provide us with quotes; a fifth, Thrivent, generally scored well, but we didn t include it in our rankings because its products are available only to members and employees of the Lutheran Church. All of the companies we spoke to stressed that annuity prices and payout rates change frequently, so interested consumers should check with individual companies for up-to-the-minute payouts and prices.
For many investors, buying an annuity comes down to one simple question: How much money will I get back? The range of answers, it turns out, is surprisingly wide. A 65-year-old man who put $300,000 in a lifelong, immediate annuity (one that starts paying him right away) could get monthly returns ranging from $1,528 (Lincoln National) to $1,967 (Presidential Life). That s a huge swing, translating to more than $105,000 over 20 years.
But experts say consumers shouldn t simply pick the annuity with the fattest paycheck. The insurer s financial strength should be a big part of the calculation. Indeed, financial planner Clifford Michaels says that companies with weaker financial ratings sometimes offer high payouts to lure more capital: They re sort of like junk bonds that way. We sorted the best from the rest by consulting A.M. Best, a consulting firm that rates insurance companies after scrutinizing their business practices and balance sheets. High-paying Presidential Life, for example, is rated B+ -- not bad for a term paper, pretty low for an insurer. (A spokesperson for Presidential Life says the company is in sound financial shape and has a long and proud history of being financially self-reliant. )
Asked for comment, Genworth and MetLife said that their relatively low payouts might reflect outdated pricing; MetLife also stressed that consumers should take its financial strength into account when shopping for annuities. Lincoln Financial, whose low payouts put it near the bottom of each of our categories, said that its rates reflected current market conditions and the company s tolerance for risk.
|* For a 65-year-old man investing $300,000.|
|New York Life||1,844||A++|
|Penn Mutual Life||1,916||A+|
Data gathered by York University finance professor Moshe Milevsky suggests that fixed annuities on sale right now are paying 10 to 15 percent less than they did in 2006. Today s unusually low interest rates are a possible culprit after all, most insurers invest the premiums from annuities in corporate bonds, whose rates fluctuate with inflation and benchmarks like the federal funds rate.
Some investors fear that these factors make this an unusually bad time to buy an annuity. But there are ways to hedge against inflation. Many planners advise clients to ladder annuities, buying smaller amounts at one or two year intervals so they can capture better payouts if interest rates rise. And some insurers sell annuities that increase their payouts by a fixed amount every year typically 3 percent. Chris Blunt, executive Vice President of New York Life, says that policies like this are relatively costly for insurers to set up, which explains why the initial payments are stingy compared to an ordinary annuity. Lack of competition may also make it more expensive: Several of the best low-cost annuity sellers, including USAA and State Farm, don t offer inflation protection.
|* For a 65-year-old man investing $300,000, with a 3 percent annual increase.|
|New York Life||1,371||25.6||A++|
Many investors spurn annuities because they re worried about losing the mortality bet, dying early and forfeiting the money they ve paid. But most insurers offer a compromise: if the customer is willing to accept smaller payouts, the insurer will continue to pay the customer s heirs after death.
We asked the top annuity sellers for prices for a $300,000 policy with a 20-year period certain meaning it would keep paying benefits for 20 years even if the original buyer died. We gave points for size of payout and financial strength, but we also rewarded insurers that didn t cut their payments drastically in return for the legacy guarantee. Top pick USAA, for example, paid period-certain customers 11.7 percent less than it paid to normal annuity holders; most of the competition paid between 13 and 15 percent less. That price advantage could put up to $750 more per year in our theoretical policyholder s pocket.
|* For a 65-year-old man investing $300,000, with a 20-year payment guarantee.|
|Penn Mutual Life||1,671||12.8||A+|
|New York Life||1,605||13.0||A++|