Transferring risk in uncertain times

Get answers to 3 key questions about insurance and annuities in the age of COVID-19.

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Key takeaways

  • Know how much exposure to financial risk makes sense for you and develop a plan on your own or with a financial professional to deal with it—or transfer it.
  • Work with insurance companies with long track records and high financial strength ratings.
  • As part of an overall retirement income plan, an income annuity can help provide an income floor, a safe haven to help you stay afloat even in uncertain times.

Uncertainty is one of the hardest things for humans to bear. And COVID-19 has delivered a bigger than normal dose.

We can't control the health risks rising from the pandemic. But we can control the financial risks we are willing to take through thoughtful financial planning, and products that let us transfer risk like life insurance and annuities.

Are you concerned about your family's ability to maintain their lifestyle after you are gone? If so, life insurance is an option to consider.

Are you nearing retirement and looking to generate income to live off? If so, an annuity with guaranteed income could help you cover your essential expenses.

The pandemic has increased interest in such strategies. But people have concerns about the safety, value and flexibility of these products. To help you decide if they are right for you, here are answers to 3 of the most common questions we hear from clients.

1. Given this pandemic, should I be worried about the financial strength of my insurance company?

"Historically, people who buy annuities during a market downturn are looking for the safety and security of an income stream. We generally recommend that people review an insurer's financial strength ratings from well-known ratings agencies when evaluating life insurance and annuity providers," says Tom Ewanich, vice president and actuary at Fidelity Investments Life Insurance Company. "Insurers that have earned high marks from ratings agencies are generally conservatively managed and properly positioned to meet their clients' obligations now and for the long term."

In addition to strong financial ratings, an insurance company's past can be an indicator of how it will manage its business during a crisis. If they have a long track record, they've lived through more than one crisis, including pandemics.

For example, most of the insurers that belong to The Fidelity Insurance Network®1 have been in business since the 1800s. They have serviced their customers through 2 World Wars, the Great Depression, the 2008 financial crisis, and the 1918 Spanish Flu, which had an estimated 50 million deaths worldwide, including 675,000 in the US.2

Tip: According to Ewanich, if you hold an insurance or annuity policy with a highly rated insurer, chances are generally good that you are still on solid footing. If you have concerns, check your insurer's website for facts and figures regarding its financial health. Also look to financial strength ratings by independent rating agencies such as Fitch Ratings, Moody's, S&P, or AM Best.3

2. With a low interest rate environment, is now the time to consider an income annuity?

From a financial planning perspective, incorporating an income annuity in a retirement plan can help cover essential expenses in retirement. With US Treasury rates near historic lows, it might be tempting to wait in hopes that income annuity payouts will increase in the future. "There's real risk with that approach," says Ewanich. "If income annuity payouts don't increase or even decline in the future, you could end up with less."

A guaranteed income annuity is generally appropriate for people who seek to reduce 2 key risks: market risk (the risk of the income-generating capacity from money being compromised by a market downturn) and longevity risk (the risk of living longer than anticipated). Remember with income annuities, an investor is locking in a guaranteed income that will last their entire lifetime regardless of how the markets perform.

If these 2 risks are top of mind for you, it may make sense to work with a financial advisor to explore ways to include guaranteed lifetime income in your financial plan with an income annuity. Says Ewanich: "Having a reliable monthly check that won't go down and gets automatically deposited into your bank account can help provide peace of mind, especially during stock market downturns or other periods of economic uncertainty."

With the US markets bouncing back from their Q1 2020 lows, it might be time to consider purchasing a portion of annuity income now—and then an additional amount at a later date. This is effectively dollar-cost averaging, designed to help you reach your desired income annuity allocation as a percentage of your overall portfolio. (Since most income annuities provide limited or no access to assets, Fidelity generally advises that annuities comprise no more than 50% of a retiree's diversified portfolio.)

Tip: Remember, as part of an overall retirement income plan, an income annuity can help provide an income floor—a safe haven to help make sure you have regular income to cover your housing, taxes, utilities, and other essential expenses, even in uncertain times. Read Viewpoints on Create future retirement income

3. Are there steps insurers are taking to help clients during this pandemic?

Yes, several insurance companies have added options to better serve their customers during this current era of uncertainty. For instance, you might get temporary penalty-free emergency relief access to a portion of your annuity account value. Another example is that some auto insurers are providing a partial refund of premiums or credits due to the reduction in automobile accidents.

Many state insurance departments are encouraging or, in some cases, requiring insurers to provide additional flexibility for their residents that have been impacted by COVID-19. The relief regulations can vary by state and by type of insurance, so if you are having trouble keeping up with your insurance premium payments, reach out to your insurer to fully understand your options.

"Several customer-focused insurance companies have stepped up to help their clients during difficult times, whether in the past due to weather-related events such as Hurricane Sandy, or now with the coronavirus pandemic," says Ewanich.

Tip: A variety of insurers, large and small, have programs to help their clients as a result of the pandemic. So don't be shy about contacting them (or your local insurance agent) to see what they might do for you.

The importance of having a strategy

This pandemic has been challenging for many families. It's important to keep an eye on your long-term financial goals despite the short-term pressures you may be feeling. Insurers have provided key essential services over the long term and are there to serve their policy holders.

Consider working with a financial professional to create a disciplined investment plan that suits your individual goals, risk tolerance, and life situation—one that can help you stay the course and guide you through difficult times.

Next steps to consider

Create income that can last a lifetime

Generate a retirement paycheck not tied to market ups and downs.

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