What About Annuities?

Nov 29, 2011 by

History Lesson

On August 21, 2008 Dick Bove (an analyst with Ladenburg Thalmann Financial Services Inc.) was interviewed on CNBC’s “Fast Money” program. While Fast Money’s sycophantic panel took turns nodding, Bove explained why he’d boosted his rating of the investment banking firm Lehman Brothers to a “buy,” meaning he recommended that investors purchase Lehman Brothers stock.

How quickly the mighty can fall

On September 9 Lehman’s stock price plunged 45%. The U.S. Government declined to rescue Lehman, and on September 15, 2008—25 days after Bove’s endorsement—Lehman Brothers filed for bankruptcy.

Lehman Brothers had been the nation’s fourth largest investment bank, a powerhouse. Immigrants Henry, Emanuel, and Mayer Lehman founded Lehman Brothers in 1850; it had survived many financial crises and the Great Depression. Similarly, investment bank Bear Stearns and insurance giant AIG morphed from industry leaders to train wrecks over the course of weeks. Rival JP Morgan Chase purchased Bear Stearns, and Treasury Secretary Henry Paulson bailed out AIG with taxpayer money.

Context for Annuity Decision

Annuities are investment products sold by private sector insurance companies. They come in many flavors; in general, you trade a chunk of cash now for a stream of income—usually monthly payments—over many years, often until your death. However, the income stream is not Government-guaranteed, unless you consider the prospect of a taxpayer bailout a sort of guarantee.

Important to any decision to purchase an annuity then is the financial strength of the company selling the product. The firm A.M. Best rates the strength of insurance companies. Before buying an annuity, take the time to learn about A.M. Best’s system and the rating it’s assigned to the annuity provider you’re considering.

Still, anything can happen. The 2008 financial meltdown vividly illuminated the risk of relying on the opinions of “experts” and rating agencies for one’s financial security.

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