For years annuities have been marketed along with FDIC guaranteed bank accounts and US Treasuries as the safest place to keep important funds. This safety issue along with annuity's contractual benefits has made them a very popular vehicle. Now with the financial crisis appearing to spread into all aspects of our economy, the logical question is how safe are annuities?
The current financial mess was created because of inappropriate mortgages provided for non qualified applicants and runaway property values. The assumption was that real estate would continue to rise and equity would be gained in home ownership. Once the melt down started, many people with home that they could not afford (and never should have qualified for) simply went into default. Once default came the holders of the mortgages asked the sellers of the mortgages to provide relief with the promises insurance against loss. As things worsened, he funds and collateral were not sufficient to survive and the overall mortgage paper had to be written down (lowered in value). Once the devaluation of the paper happened, banks were left short of reserves because of having to provide additional collateral for the reduction in value of the mortgage paper.
A vicious cycle occurred, homeowners were evicted, the values of the homes declined, the value of the mortgage paper declined, the backs had to find collateral to cover reserves, the insurance companies who insured the loans were short on collateral and all this created the failure of banks and the investment bankers who created the whole scheme.
Insurance companies have come into the fray because many of them had purchase (provided the money) to make fund the mortgages. For the insurance company it seemed like a prudent move, insured mortgages. Insurance companies want a fair yield without exposure to loss and the mortgage being insured to them was an ideal offering. The problem was that the original mortgages were being written with almost no oversight and with a potential larger than expected default rate appearing, there just weren't enough assets to guarantee the loans. AIG is a fine company and their insurance and annuity divisions are the envy of the industry but their investment arm bought and sold these mortgages which created the whole collapse of the company and the eventual takeover by the US Government.
AIG and other insurance companies who sell and service annuities fall under the state guarantee fund of each individual state. If an annuity issued by AIG were to be questioned about it value and its security, the answer is "absolutely." All contracts issued by AIG (except variable) are fully insured to their states limits. In the real world for AIG, their insurance and annuity companies are well managed and have more than enough assets to maintain their commitment to their policy owners and it is extremely rare that any state guarantee fund would be called on the assist the company. This division of AIG will be purchased by another insurance company and business will continue just as before.
That site beauty of the annuity contract, guarantees and continuance is always guaranteed. Like the FDIC, the annuity contract is covered by insurance limits established by each state. These limits vary from $100,000 to $500,000 depending on the state of residence of the annuity owner. Is there any reason for concern? I think that answer is yes…sort of. If the federal government does not get regulatory control over Wall Street and the way it creates products then the issue will continue to a concern. Management of insurance companies should be primarily left to each state department of insurance and never allowed to come under federal control. That is very obvious after this financial mess created by greed in the mortgage marketplace.
The current and future administrations have to get their act together and remember they are elected by the US taxpayer and they should make every effort to protect su and our futures on a greater level than a few Wall Street powers.
The last few days focused a lot on the bailout and the rescue for Wallstreet. What has become clear for all of us is the fact that prices have increased, starting with fuel after the Katrina Hurricane a few years ago, and now affecting almost every aspect of life.
In addition, what was thought to have been a never ending increase in home values (the biggest retirement nest egg for most) has come to a screeching halt and reversed to the tune of 20-30% in many areas of the country. With the collapse of one bank after another, and huge takeovers by the government (Freddie and Fanny come to mind, as well as AIG), the remaining institutions have reacted in a way that is pretty typical whenever something goes wrong in the United States.
Initially there is a tendency to squeeze out every little possible advantage of a situation and then the pendulum swings all the way to the extreme other end. Case in point: Banks and other lenders were giving away mortgages and credit lines to people without any proven income, for significantly overpriced houses, and to top it of, they didn't ask for any down payment, any principle payment, and even substituted the remaining interest payments - all with the claim that the rising value of the property will take care of everything in 2-3 years.
If you, as a private person, have paid your mortgage the old fashioned way, every month, with interest and principle, and based on a down payment of 10-20%, you would think those banks and lenders you worked with would appreciate your good behavior and see you as a great customer.
Your house is probably still worth more than you borrowed for it, even after all the corrections. But- if you would go and ask for a new mortgage or a new line of credit right now, chances are you will not get it, regardless how well you behaved the last 5 years.
It's not that nobody likes you, but the banks and lenders have decided not to take any risk anymore. Now they want to know everything they never asked for in the past - and then some, before they would even consider giving you any money.
What does that have to do with the environment and eco-consciousness?
Well, in the last few years organizations, Nobel-prize winners (like Al Gore) and ordinary shareholders demanded that lenders and banks would pay attention to the impacts of projects on the environment and the policies of the companies they gave money to.
Have you ever asked yourself how it was possible that thousands upon thousands of houses were build during the real estate boom and almost none of them had a solar panel or a heat exchanger in sight? They were build fast and cheap, even though most real estate is going to be around for 50 years and all the required technologies were available.
While states all across the country mandated to the energy companies to produce ever increasing portions of energy with alternative means (Wind, Solar, wave-actions, etc.), the building industry received money hand over fist without any of those demands. Actually builders frequently had problems getting money if they wanted to implement these eco-systems because it would make their buildings less competitive compared to other players in the same market.
While all this has been going on, the consumers and investors (shareholders) have been demanding more environmental sensitivity by the companies they own or finance. In October 2007, discussing the value of so called Renewable Energy Credits (REC's) that companies buy when they don't really reduce their impact on nature, here is what Business Week wrote:
"Johnson & Johnson has proclaimed a 17% reduction in carbon emissions since 1990, based largely on RECs. Without the credits, the pharmaceutical giant has seen a 24% increase, J&J executives acknowledge. "Recent corporate moves by J&J and others are pushing in the right direction, but it is still window dressing compared to the problem at hand," says Hunter, the former J&J manager.
Amid the overheated claims, some corporations have made legitimate environmental gains. Wal-Mart Stores (WMT ) helped spark the market for energy-saving fluorescent bulbs by giving them top billing, even though incandescent bulbs are more profitable. Office Depot overhauled lighting and energy in more than 600 stores, contributing to the company's real 10% decline in releases of heat-trapping gases. Dow Chemical (DOW ) and DuPont (DD ) have significantly trimmed their actual emission levels. But there is still reason to worry about long-term commitment. Dow says it invested $1 billion to help achieve reductions of 19% between 1994 and 2005. Because of technological challenges and costs, however, Dow predicts that additional cuts won't occur until 2025, 18 years from now."
So how does the current crises change all this? I think the same way the lenders and banks now ask us to show every detail of our income, our ability to pay our dues, our commitment to our obligations, and our willingness to limit our appetite for all sorts of consumer credit, they will follow demands of their shareholders and hold companies to the same standard.
When companies want to finance projects in the future, I believe it is very likely that banks will not only look at the financial risks, but also at the long term impact and the opinions and demands of consumers and shareholders.
Many studies have shown that the public at large in all its' different roles as investors, consumers, employees, parents, etc. demands more green initiatives and eco-consciousness - to the tune of 75%+.
Though things might look pretty gloomy right now, I am optimistic that one of the positive outcomes of the current financial crises might well be that banks and other lenders will not just look at the numbers, but also at the impact of a project or proposal on the environment,- not because they suddenly got smart, but because their constituents on all levels simply demand it.
That's the good thing about a painful cleansing like the one we are witnessing right now. Some unexpected benefits can come from it, and I hope we all and our children will be better of in the long run, because of it
Both Bill Broich & Axel Meierhoefer are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Bill Broich has sinced written about articles on various topics from Culture and Society, Marketing and Life Insurance Annuity. Bill Broich helps insurance agents grow their busineess with leads and marketing insight. . Bill Broich's top article generates over 201000 views. to your Favourites.
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