Insurance companies design and sell products called annuities that help you prepare for retirement. Annuities are insurance policies that guarantee an income for life or for a specific period of time. Some annuities are set up to defer this immediate payment and act as a long-term savings for a period of five, 10, 15 or more years. Before choosing a variable annuity, make sure you understand the company behind the product you are buying.
Types
There are two types of insurance companies. The most common is a stock insurer. A stock insurer is a publicly traded company. Shares of the company are sold to investors. The initial stock offering helps the insurance company raise money for its operation. A mutual insurer is an insurance company owned by its policyholders. It has no outside shareholders.
Significance
The significance of a stock insurer is that the stock insurance company has two obligations. First, it must manage the interests of its shareholders with the interests of its policyholders. Technically, the stock insurer's first obligation is to the shareholders, not the policyholders. The significance of the mutual insurer is that its only obligation is to the welfare of its policyholders.
Features
Stock insurance companies may offer more feature-rich products than a mutual insurer because the company is motivated by shareholder's demands for profit to create new product lines that will appeal to prospective policyholders. This is not to say that mutual insurance companies won't or cannot offer feature-rich products. However, mutual insurers tend to be more conservative in their product lines and tend to work for the long-term benefit of their policyholders at the expense of riskier designs that may not sell. Since their only or primary source of new income is policyholders, they cannot afford to take the same risks as a stock insurer.
Benefits
When comparing insurance companies that offer annuities, consider what benefits you are getting. Different insurance companies offer various product lines aimed at different investors. For example, one insurance company may focus primarily on fixed annuities for conservative investors. Another company may focus on variable annuities for more aggressive or daring investors.
Expert Insight
The choice of insurance company eventually depends on two things. You must make sure the company you choose is financially strong. Independent rating agencies like A.M. Best can verify this. The insurer also must offer the type of annuity you are looking for. The annuity should fulfill the long-range purpose you have for investing in retirement.
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