Annuities Are Back in Fashion, But Are They Safe?

One factor that can go either way is that a portfolio might fail to deliver the 4% above inflation, while the annuity is guaranteed though tied to the insurer’s financial strength. In the kind of market meltdown that might deliver unprecedented long-term losses in stocks and bonds, it’s anyone’s guess whether individual portfolios or insurance companies would fare better.Insurers offer a few variations beyond real life annuities, but all of these — for example, fixed payments without inflation increases or variable payments tied to market indices — will benefit in the current rates environment; and are facing similar competitive pressures to bring in new customers .It’s not just the asset side causing concerns either. Competition has led some annuity companies to offer investors more liquidity and flexibility. While that’s good for customers in the short run, it could introduce the risk of something akin to runs on banks. If interest rates keep rising, even annuities securely funded with cash-flow matched, high-quality, fixed-income assets could fail. Annuity holders might redeem to get higher rates elsewhere, forcing the annuity provider to sell assets at a loss, imperiling its financial stability, causing more annuity holders to redeem, until the slowest customers are left with nothing.