Annuity Guarantees – Guaranteed Principal Protection (Money Back Guarantees)

Some annuities offer a money back guarantee, although the most generous guarantees went away after the financial crisis of 2008. Insurers might call these features a principal protection guarantee, or something similar. How do guaranteed principal annuities work?

The general idea is that you’re guaranteed to get all of your money back from the insurance company at some point in the future. If you invest in a variable annuity and the investments lose money, they’ll make up your losses and give you all your money back. Fixed annuities, of course, are much simpler: your account value doesn’t go up and down, so the insurance company just promises to return your money along with some interest.

This page is part of a series on annuity guarantees, and mostly discusses variable annuities while mentioning some alternatives like index annuities. That might not be exactly what you’re looking for:

  • Just want to learn about fixed annuities? See What is a Fixed Annuity? (fixed annuities are also principal protected investments, but you get your money back over time).
  • Just want to know if you can get your principal back (for example, if you die or change your mind before receiving all of the payments)? See Do you get your Principal Back from an Annuity?

Now, let’s dig deeper into how you might get principal protection from an annuity that also allows you to go for some growth.

The Price of Guaranteed Principal

Of course, there’s a price to pay for guaranteed principal protection if you use a variable annuity. The protection usually comes in the form of a ‘rider,’ or an added feature that you purchase with your annuity. The rider costs extra – perhaps 0.65% per year in increased expenses.

When Will the Annuity Guarantee Pay?

The type of guarantee determines when you’d qualify for a guarantee.

The simplest guarantee: most guaranteed principal protection programs require that you wait 5-10 years before you can take advantage of the guarantee. You generally can’t put your money in at year 1, see a loss in year 2, and get all of your money back immediately (unless it’s a death benefit). You have to reach certain agreed upon milestones before you can get your money back.

This gives the insurance company time to let the markets work in their favor. If you could take advantage of every weekly loss, the insurance companies would be out of business fast – or the cost of guaranteed principal protection would get too high.

The longer you have to wait for your guarantee, the less likely it is that you’ll need it. Losses over 10 year periods are rare, but they certainly happen. It’s extra peace of mind – just be aware that you’re paying for these features, and evaluate how badly you need them. Higher fees mean your account will grow more slowly over time and you’ll have less money in the future.

Systematic payments: some annuities use a “hypothetical” account or they return your investment (plus growth, hopefully) to you over time. Scroll down to other annuity guarantees for more discussion.

Death benefits: if your contract offers a death benefit with some type of high-water-mark, the death of the contract annuitant triggers the principal protection guarantee. For example, you might deposit $100,000 and see the account value fall to $85,000 due to market volatility. With some annuities, the beneficiaries could receive the full $100,000 (the insurance company makes up the remaining $15,000).

What Happens After the Guarantee Pays Off?

In a best-case-scenario, you can walk with the money. You’d have the opportunity to take money out of the annuity and spend it, transfer to another annuity or annuity company, or put it into a brokerage or bank account. You may have to pay taxes and/or tax penalties, so talk with a tax preparer before you do anything. Be mindful of surrender charges (fees charged by the insurance company when you withdraw money), especially in the early years of your annuity contract.

What are the Drawbacks of Guaranteed Principal Protection Annuities?

The main drawback is the cost. However, there’s no such thing as a free lunch, so you might feel that guaranteed principal protection is well worth the cost. There are plenty of examples when you would have come out more than ahead with guaranteed principal protection. There are also times when you would have wasted money. Think of it as ‘market loss insurance’ and decide if it’s worth the cost.

Another thing to watch for is the period of time that you have to wait. The guarantee only applies if you can wait long enough. If you need to cash out early, you don’t benefit from the guarantee.

You should also make sure you only use strong insurance companies. The annuity’s guaranteed principal protection promise is only as good as the company making the promise. If the insurance company goes belly up, the guarantee is worthless.

Annuities, like everything else in the world, are imperfect. Make sure you understand the pros and cons of annuities before using one.

What Other Options Exist?

Unfortunately, the financial crisis led most insurers to get discontinue principal protected products. As you might imagine, those products became very expensive during 2008 and 2009, when the insurance companies had to cover huge losses for customers. However, there are still a few ways to protect your money, but they might not be as simple as a money-back guarantee.

Index annuities still offer something similar to principal protection, while still allowing you to get some exposure to the markets. However, these products come with plenty of strings attached. They lock your money up for even longer than most annuities, they typically “cap” your earnings so you don’t get the full benefit of participating in the markets, and they are extremely easy to misunderstand (you don’t want to put your nest egg into something you don’t understand). All that said, if you’re willing to do a lot of research and get plenty of second opinions (not just from index annuity salesmen) you may find that an index annuity fits your needs.

Other annuity guarantees might also give you something similar to the principal protection you want, only the repayment will come more slowly than a simple lump-sum. Presumably, your main concern is running out of money due to a market crash. You can still pay an insurance company to protect against that risk if you want. Most insurance companies still have products that provide lifetime income or guaranteed minimum withdrawal benefits.

Fixed annuities are always an option if you’re not interested in investing in the markets. The value of those annuities does not fluctuate with markets. Instead, you get paid some percentage of your initial deposit amount each year, similar to what happens in a savings account. While fixed annuities are considered much safer than variable or index annuities, they still have some risks. First, as with any annuity, the guarantee to get your money back is only as good as the insurance company holding your money. Also fixed annuities sometimes use “teaser” rates, which make you think you’re going to earn a lot more than you really will.

Be sure to investigate any insurance company’s financial strength, and figure out how much you’ll earn year-by-year (don’t just assume you’ll get what’s shown in an advertisement). Finally, fixed annuities might not help you manage the risk of going broke slowly with inflation as well as higher-risk investments.

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