7 Responses to “ How can the insurance companies guarantee a minimum of 5%interest in their annuities? ”

1. Robert N on September 2nd, 2010 12:07 am

   because they don’t pay there insurance victims on the level .

2. deep5223 on September 2nd, 2010 12:07 am

   Because they are making more than 5% on your money by pooling it with other money and investing it wisely.

3. Joe the Expert on September 2nd, 2010 12:07 am

   In this market they are only Guaranteeing 5%+ in the 8 to 10 Year range. You commit to a holding period of 8 to 10 years and you earn great rates for that period of time, Guaranteed.

   An Insurance Company is one Huge Investment Portfolio! At any given point in time they can Guarantee you X% if you commit to XYears.

   An Insurance Company Invests mostly in Highly rates corporate bonds, commercial real estate, they buy companies outright for cash make they very profitable and then sell off the stock to all others (A low risk way to invest.in companies). Mutual Funds, Investors, others then assume all the future larger risk of investing in that company.

   They are Highly Skilled Money Managers, investors, Corporate Managers.

   By putting your dollars into Fixed Annuities, Fixed Index Annuities and Immediate Annuities your are putting your money into the safest companies and the most highly rated companies in the world. They invest your money and you are insured of the benefits!

   A great place to visit for Fixed Annuities, Fixed Index Annuities and Immediate Annuities is http://www.jdsannuities.com

4. markmywordz on September 2nd, 2010 12:07 am

   Because many times while they sell you on the attractiveness of the "floor" or minimum guarantee, they totally hide from you that there is in many cases a "ceiling" or maximum you earn.

   This ceiling means even in times of great financial return, you can only earn the capped amount and the issuer keeps the rest.

   It is exactly this cap that allows them to offer you a ‘floor’ or guarantee.

5. Taranto on September 2nd, 2010 12:07 am

   Insurance companies take the money that you give them & invest it in bond portfolios. The bonds pay principal an interest through time, and pay more than 5%. The insurance company keeps the difference.

6. MostChoice.com on September 2nd, 2010 12:07 am

   The other answerers have it right when they say that they can make more money off of your money than you can because they can invest in bulk and over a longer period of time. It’s like any personal investment you might have. The more you invest and the longer you invest it, the higher rate of interest you will earn, as a general rule. One reason you know life insurance companies are not hurting with the interest rates they offer is that they set their own rates!

   Check out MostChoice.com if you would like to compare local annuity rates and speak to state-licensed annuity representatives. It’s a fast, free way to get a bird’s eye view of the local annuity market and talk to knowledgeable industry experts without any cost or obligation.

   You can visit MostChoice here:
   http://www.mostchoice.com/annuity.cfm

   Hope this helps,
   Barnes@MostChoice

7. Bright Future Penguin on September 2nd, 2010 12:07 am

   Hi! Your friendly insurance guy here again.

   Insurance companies can offier rate guarantees for several reasons, some of which have been posted already. I’ll try to give an overall view.

   First:
   Insurance companies are run, at the core, similarly to casinos. That means they are run entirely on the premise that, over time, with a large enough sample size, the laws of probability hold true. For a casino, that means if you have a game where the house tends to win 51% of the time, even though players sometimes win, if you play the game a million times the house should pretty much end up with a that 51% win rate. It’s more complex than that, but it gets the point across.

   For insurance companies, it means that with eenough insured people out there, knowing what the average mortality and morbidity rates are, with properly set premiums, again, the company should be on the winning (profitable) end in the long run.

   Regarding annuities in particular, it means that since the stock market changes value, but over time has tended to follow a certain level of gain, if they can get you to invest for at least a certain length of time, statistically the insurance company is likely to see approximately that much gain. That average long-term gain is significantly more than 5%. Most annuities, if you look at the guarantees of that sort, require keeping the money invested for at least 7-10 years. This allows the insurance company to have the greatest statistical chance of beating that 5% gain they have guaranteed so they don’t have to credit your account out of their own money. If they tried to guarantee that for only one year of required investment, any time the market fell in a given year the insurer would be paying contract owners out of its own coffers. It hedges against downturn by requiring minimum periods of ivnestment, and charging a heft fee for early termination of the contract. These fees are usually called SURRENDER CHARGES" or "CONTINGENT DEFERRED SALES CHARGES." They often range up to 8% or even 10% of the contract value.

   They also typically require you to annuitize to keep the gain; meaning accept distribution via regular installment payments, typically for a single individual’s lifetime or a fixed number of years. This also adds to the amount of time the insurance company has to wait for market upswings that let them beat the 5% they guaranteed you and minimized the amount of the insurer’s own money it must pay out in the event of downturn in the market.

   In some cases, typically with Equity Indexed Annuities, there is also a cap, as one prior respondant mentioned, limiting your upside potential. It is in this case, and in this case only, that the insurer "keeps the difference". In all other annuity situations the gain belongs entirely to the contract owner, less annuity contract charges and fees.

   I hope this helped answer your question.

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