Hi there, Stan The Annuity Man, Americas annuity agent, licensed in all 50 states. Im so glad that you joined me for this blog. This is another one of those blogs that you put in the questions under one of our videos from the Stan The Annuity Man YouTube Channel. You can put in questions, submit a question or comment. And sometimes I look at that and go, “Thats fantastic. Thats a great question. And Im going to put it in a blog for infinitely evergreen content, so this person and their question will live in infamy for the rest of time as the Stan The Annuity Man blogs grows and grows and grows and grows to infinite levels and popularity.
âThe person who submitted the question is Nikki Name, and I love that name. Nikki Name. I want to change my name to Nikki Name, thats awesome. The question is, what happens to an annuity if the stock market crashes? Nikki had a lot more questions about that, and following up, I answered all of them. Im going to answer them again in this blog, and I can only imagine how excited you are to hear the questions and the answers.
âSo, are Fixed Index Annuities good against a stock market crash? What if the insurance company backing it goes under? Whats your protection? Lets take them one at a time.
âFIAs, Fixed Indexed Annuities are CD products. They were introduced in 1995 to protect you and your principal from market loss. So, the answer is yes, its a Fixed Annuity. Its not a security, a market-type product, or a market return product, regardless of what you hear out there. Fixed Index Annuities are CD-type products with normal CD returns. They do protect your principal if you attach an Income Rider to it. If you do that, there are fees for the Income Rider. But you wont lose any money if the market goes into the toilet. And that is a good thing for Indexed Annuities.
âThe second question, what happens if the insurance company backing that Index Annuity goes under? Its a good question. Now, with CDs and things like that, youre backed by FDIC Insurance. Its the best coverage you can get; the annuity industry has nothing to compare to that. Lets be very clear. The annuity company, each state for Fixed Annuities, in this case, Fixed Index Annuities, falls under that Fixed Annuity category. Theres a state guaranty fund that backs up the policy to a specific dollar amount, and every states different. The site is www.NOLHGA.com. You can pull it up and look at your states coverage limits.
âI encourage you not to put a lot of weight on that. What I want you to do is understand that when you bind an annuity of any type, you cant say, “I hate all annuities.” No, there are many types of annuities. They all do different things and have different benefit propositions, limitations, etc. But base your decision on the Claims-Paying Ability of the carrier, period.
Worried about your retirement savings going up in smoke during the next market meltdown? You’re not alone. With economic uncertainty inflation concerns and geopolitical tensions making headlines daily, many retirees and pre-retirees are losing sleep over their financial future.
I’ve been researching annuities for years, and one question keeps coming up “What happens to annuities when the stock market crashes?” The answer isn’t as simple as “they’re safe” or “they’re not” – it depends entirely on what type of annuity you have.
In this comprehensive guide, we’ll explore exactly how different annuity types perform during market downturns and help you understand which options might offer the protection you’re looking for.
The Bottom Line Up Front
Not all annuities are created equal when it comes to market crashes Here’s what you need to know
- Fixed annuities, MYGAs, and immediate annuities are NOT affected by market crashes
- Fixed indexed annuities are protected from losses but may earn zero interest in down years
- Variable annuities CAN lose value during market downturns unless they have special riders
Now let’s dig deeper into each type.
Understanding Different Types of Annuities
Before we dive into crash scenarios, let’s quickly review the main types of annuities:
- Fixed Annuities: Provide guaranteed interest rates for specific periods
- Multi-Year Guaranteed Annuities (MYGAs): Similar to CDs, with guaranteed rates for the entire term
- Immediate Annuities (SPIAs): Convert a lump sum into immediate guaranteed lifetime income
- Fixed Indexed Annuities (FIAs): Offer returns linked to market indexes but with downside protection
- Variable Annuities: Invested in subaccounts similar to mutual funds with market exposure
Each of these responds differently when markets head south.
Fixed Annuities: The Safe Harbor in Market Storms
If you’re worried about market crashes, fixed annuities are like your financial storm cellar. These products are completely insulated from market volatility.
As Stan The Annuity Man explains, “Fixed Annuities are CD products… they protect your principal from any market loss.”
When you invest in a fixed annuity, your money isn’t directly exposed to the stock market at all. Instead, insurance companies invest your premiums in conservative bond portfolios and income-producing instruments. They’re required by law to maintain enough cash reserves to cover every dollar of outstanding premium they’ve issued.
Even if the stock market plummets 50% tomorrow, your fixed annuity would continue earning its guaranteed interest rate without missing a beat.
MYGAs: Locked-In Rates Regardless of Market Conditions
Multi-Year Guaranteed Annuities (MYGAs) are essentially time-deposit products that work similarly to CDs but are issued by insurance companies rather than banks.
The beauty of MYGAs during market crashes? Your rate is locked in for the entire term, regardless of what happens on Wall Street. If you have a 5-year MYGA paying 5.25% (which is possible in today’s rate environment), you’ll get exactly 5.25% annually for all five years even if the market experiences multiple crashes during that period.
According to SafeMoney.com, “MYGAs are just as safe as traditional fixed annuities when it comes to market crashes. Multi-year guaranteed annuities guarantee both the principal and interest earnings to annuity owners, irrespective of how the stock market performs.”
Immediate Annuities: Unfazed by Market Turmoil
Single Premium Immediate Annuities (SPIAs) convert a lump sum into guaranteed income payments that can last for a specific period or your entire lifetime. Once established, these payments are contractually guaranteed and completely immune to market crashes.
When you purchase an immediate annuity, the insurance company calculates your payout based on several factors including your age, interest rates, and life expectancy. After that calculation is done and your payments begin, market performance becomes irrelevant to your income stream.
This makes SPIAs particularly valuable for retirees who want predictable income they can’t outlive, regardless of market conditions.
Fixed Indexed Annuities: Limited Downside, Limited Upside
Fixed Indexed Annuities (FIAs) represent a middle ground between completely safe fixed annuities and more volatile variable products. They’ve become increasingly popular because they offer some market participation without the risk of losing principal.
When the market crashes, here’s what happens with an FIA:
- Your principal remains 100% protected (minus any withdrawal penalties or rider fees)
- You’ll likely earn zero interest for that crediting period
- When the index rebounds, you’ll start earning interest again based on the new, lower starting point
As Krisstin Petersmarck, a retirement income certified professional, explains: “A fixed indexed annuity has market participation. So, for example, if the stock market goes up 10% and you are participating up to 6%, then you get 6% versus the 10%.”
The trade-off is clear: you give up some upside potential in exchange for protection against losses.
Variable Annuities: The Most Vulnerable to Market Crashes
Variable annuities are the only annuity type that can actually lose value during market downturns. These products invest your money in mutual fund-like “subaccounts” that are directly tied to market performance.
According to SafeMoney.com, “Unlike fixed, immediate, MYGA, or fixed indexed annuities, it’s possible to lose money in a variable annuity. This is because the money that you put into a variable annuity isn’t placed into the insurance company’s general cash reserves… It’s instead invested into mutual fund subaccounts that invest in stock, bond, and real estate markets.”
If the market takes a nosedive, your variable annuity’s value will likely follow suit. However, many variable annuities offer optional income riders that can provide guaranteed income regardless of market performance. These riders usually come with additional fees but may be worth considering if you want both growth potential and some downside protection.
But What If the Insurance Company Fails?
One concern that often comes up is: “What if the insurance company backing my annuity goes bankrupt during a market crash?”
While this is a valid question, the annuity industry has safeguards in place:
- State guaranty funds provide backup protection up to certain limits (typically between $100,000-$300,000, varying by state)
- Reinsurance companies step in to cover obligations if the primary insurer fails
- Insurance companies are heavily regulated and must maintain substantial reserves
As Stan The Annuity Man points out, “With Fixed Annuities, they have to keep a hundred percent of your money on hand, day one, liquid and investment-grade bonds.”
That said, it’s still smart to check the financial strength ratings of any insurance company you’re considering. Look for companies rated A or better by major rating agencies like AM Best, Standard & Poor’s, Moody’s, or Fitch.
Smart Strategies for Using Annuities During Market Volatility
Based on the information from our sources, here are some practical strategies for using annuities to protect against market crashes:
The Annuity Ladder Strategy
One effective approach is to create an “annuity ladder” by purchasing multiple annuities with different start dates. This gives you both immediate protection and the potential to capitalize on higher rates in the future.
For example:
- Put some money in an immediate annuity for current income
- Invest some in a 3-year MYGA for short-term needs
- Use a portion for a 5-year MYGA for medium-term goals
- Allocate funds to a Deferred Income Annuity (DIA) or QLAC for future income needs
The 50% Fixed Income Rule
Pamela Sams, a chartered retirement planning counselor, recommends “having at least 50% of your retirement income coming from some fixed type of source, either guaranteed income through an annuity, Social Security, pension type of things that you know that you can get on a month-to-month basis.”
This provides a solid foundation of reliable income regardless of market conditions.
The Defer-to-SPIA Strategy
Stan The Annuity Man mentions his favorite strategy, which he calls the “Defer to SPIA strategy.” This involves:
- Using a fixed-rate product like a MYGA during your accumulation years
- Converting to a Single Premium Immediate Annuity when you need income
This approach gives you guaranteed growth followed by guaranteed income, with no market risk at any stage.
Comparing Annuity Safety During Market Crashes
Let’s look at how different annuity types compare when markets crash:
| Annuity Type | Principal Protected in Crash? | Income Affected by Crash? | Growth Potential |
|---|---|---|---|
| Fixed Annuity | Yes, 100% | No change | Low |
| MYGA | Yes, 100% | No change | Low |
| SPIA | Yes, already converted to income | No change | None (pure income) |
| Fixed Indexed Annuity | Yes, 100% (minus any rider fees) | No change, but may earn 0% | Medium |
| Variable Annuity | No, can lose value | Depends on riders | Highest |
Real-World Example: What Would Happen in a 2008-Style Crash
Let’s imagine you had $100,000 in different annuity types right before the 2008 financial crisis when markets fell about 40%:
- Fixed Annuity (4%): Would have grown to approximately $104,000 regardless of the crash
- MYGA (4.5% 5-year): Would have grown to about $104,500 in the first year, unaffected
- SPIA (65-year-old male): Would have continued paying about $6,000/year for life
- Fixed Indexed Annuity: Would have earned 0% during the crash year, but preserved the $100,000 principal
- Variable Annuity (without riders): Might have dropped to around $60,000, reflecting market losses
This stark contrast shows why many risk-averse retirees gravitate toward fixed and indexed products during volatile times.
Common Questions About Annuities During Market Crashes
Do annuity fees increase when the market crashes?
No. Annuity fees are typically fixed as a percentage and don’t change based on market conditions. However, with variable annuities, since the account value may decrease during a crash, the dollar amount of fees would decrease proportionally (though the percentage remains the same).
Can I cash out my annuity if I see a crash coming?
Technically yes, but it’s usually not advisable. Most annuities have surrender periods with penalties for early withdrawals. These can range from 5-10 years and penalties can be as high as 10% of your withdrawal amount. Additionally, if you’re under 59½, you’ll face an additional 10% tax penalty on withdrawals.
Will my annuity income keep up with inflation after a market crash?
It depends on your specific contract. Some annuities offer cost-of-living adjustment (COLA) riders that increase payments annually, regardless of market conditions. However, these riders typically reduce your initial payment amount and may not fully offset inflation, especially after significant market corrections that lead to economic changes.
Conclusion: Finding Safety in Uncertain Times
When markets crash, having the right annuity can make the difference between sleepless nights and financial peace of mind. The key is understanding exactly what you own and how it’s designed to perform in different conditions.
If safety is your primary concern, fixed annuities, MYGAs, and SPIAs offer the greatest protection against market volatility. Fixed indexed annuities provide a middle ground with some upside potential while still protecting your principal. Variable annuities offer the highest growth potential but come with genuine market risk unless you add (and pay for) protective riders.
Remember, there’s no one-size-fits-all solution. The best approach is often to diversify across different annuity types and other investments based on your specific needs, timeline, and risk tolerance.
And always, ALWAYS work with a reputable financial professional who can explain all the features, benefits, limitations, and costs of any annuity you’re considering. Your future self will thank you.
What questions do you still have about annuities and market crashes? Drop them in the comments below!
âAnnuity Companies Aren’t Smarter Than Banks
âNow, annuity companies arent smarter than banks. Theyre more regulated than the banks, in my opinion. With Fixed Annuities, they have to keep a hundred percent of your money on hand, day one, liquid and investment grade bonds. You can go down the rabbit hole if you want to argue about investment grade bonds, but thats as good as it gets. So, look at the Claims-Paying Ability of the carrier. There are four major rating services: Standard and Poors, Moodys, A.M. Best, and Fitch. We also have a COMDEX score thats not perfect, but it is also a way to track the stability and financial security of the company issuing the policy. Because you buy an annuity for what it will do, not what it might do. The will do is the contractual guarantees. Youll get a contract in the mail; its called a policy, but its a contract. You buy it for the contractual guarantees and ensure that that company can back up the claims. I can do that for you. I can help with that recommendation with my background with Dean Witter, Paine Webber, Morgan Stanley, and UBS. I know how to look at bond holdings, solvency ratios, etc. And Ill tell you if you dont need to be there with that company. You can contact me by easily scheduling a call.
âThe other thing you should keep in mind from a safety standpoint is that the annuity industry does an excellent job of self-regulating. I call it the annuity mafia, but the big guys oversee the little guys because, remember, annuities, regardless of the type, are confidence products. And the annuity industry knows they cannot have the consumer lose confidence in these transfer risk contractual guarantees. We see a lot of consolidation in the annuity industry, but the bottom line is I will work with you to ensure were choosing the right company. I represent pretty much every carrier out there, all the ones youve heard of and all the ones you havent. So, thats the answer to that question.
âOkay, here are a couple more excellent questions from Nikki Name. Heres one of them. What if you dont care or want an Income Rider attached but wish to protect the money against market crashes? Then, an Index Annuity could work. Also, a Multi-Year Guarantee Annuity, a Fixed Rate Annuity would also work. Both MYGAs, Multi-Year Guarantee Annuity, and FIA, Fixed Index Annuities, are Fixed Annuities and protect from market crashes.
âThe other question that Nikki had was asking about the liquidity of an Indexed Annuity. Most Index Annuities, the vast majority, allow you to take out 10% penalty free annually. Theyre not all like that, but the vast majority are like that. Meaning that if you put a hundred thousand dollars in and you said, “Okay, Stan, Im in month 12.” Or whatever. “How much money can I get out penalty free?” Itd be 10% of whatever that accumulation value would be.
âAll right, so Nikkis questions were excellent. But I took a little bit of extra time because I care. I care about you guys out there, and I want to make sure that you understand this annuity world because its convoluted, and there are a lot of salespeople out there. I call them shucksters, but theyre shysters and hucksters. And a shuckster, by the way, is someone who shucks oysters at an oyster bar. Just in case you want to write that down. But here are the questions that I came up with. Are annuities safe in a market crash? And does the stock market affect my annuity?
âYes, Index Annuities, which is what Nikkis talking about, are safe from a market crash. Theyre Fixed Annuities. Theyre not securities but Fixed Annuities issued at the state level. And the second question, does the stock market affect Index Annuities? On the downside, no, youre not going to lose any money. But remember the Index Option side, now this is the part that the salespeople out there push the truth a little bit too far. Remember that Fixed Index Annuities were designed in 1995 to compete with normal CD rates. Its not a market product. And if you bought one and think it is, its not. Its a principal protection product that youre going to get a normal CD-type return.
âSo, Nikki Name, home run. If youre a baseball player, Im telling you right now, those were good questions. I appreciate you putting them in the comments on our YouTube Channel.
âHey, thanks for joining me on the Stan The Annuity Man blog, and I will see you next time.
Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.Share this article: