What a guaranteed investment means
The dictionary defines guaranteed as a formal assurance or promise, especially that certain conditions shall be fulfilled relating to a product, service, or transaction. All of us like the sound of something we bought being guaranteed. But most of us realize that the guarantee is only as good as the person or company that made the guarantee.
A certificate of deposit, savings account and money market account issued by a chartered bank or savings association is guaranteed up to $250,000 by the Federal Deposit Insurance Corporation(FDIC), and those offered by credit unions are insured up to $250,000 by the national Credit Union Administration (NCUA). The FDIC’s insurance coverage includes principal and interest through the date of the bank failure to applicable insurance limit for each deposit. The accrual of interest ceases on all accounts once the bank is closed. Simply said, your money in a CD will stop receiving interest if your bank closes and you will never get back more than $250,000 per CD.
In the spring of 2023 multiple high-profile regional banks suddenly collapsed: Silicon Valley Bank (SVB), Signature Bank and First Republic Bank. While there were many reasons for their collapse, many depositors lost money.
Annuities are another investment tool sold only by insurance companies. They guarantee either a rate of return on the principle or a guarantee on the withdrawal of principle over periods of time. Annuities are regulated by nonprofit insurance guaranty associations at the state level. These state guaranty associations will pay claimants in the unlikely event that an insurance company becomes insolvent and cannot pay. Coverage is limited and varies by state. In Pennsylvania the limit the association will pay is $300,000 in annuity benefits, or $100,000 in net cash surrender or withdrawal benefits. The Pennsylvania guaranty association provides coverage to owners of covered policies issued by member insurers licensed to write business in the state. To determine if a company is licensed to write business in Pennsylvania, you may call the state Insurance Department at 717-787-2317.
Consumers can also find information on the financial strength of the issuing insurance company from rating agencies. Rating agencies assign comparative ratings to insurers based on various criteria. Most rating agencies are paid by insurer to do an assessment examination and to issue a rating. This is the case with the largest and most well-known agencies, such as Standard & Poor’s, AM Best, Moody’s, and Fitch Ratings. These ratings are available to the public without charge.
In doing some research I found the Pennsylvania guaranty association does not cover fraternal benefit societies, mandatory state pooling plans, mutual assessment companies, insurance exchanges and qualified charities issuing only qualified charitable gift annuities.
If you are looking at an annuity and want security, make sure the issuing company participates in the Pennsylvania guarantee association and is rated highly by a rating agency. If a company does not have a rating or does not participate in the guarantee association, then understand the added risk you are taking. These companies usually promise higher rates of return. Ask yourself is the higher rate worth the risk.
Lastly, investments in the stock market are not guaranteed.
Bob Hollick is a State Farm Insurance agent based in Washington. His column appears every other Friday in the Observer-Reporter. If you have a column topic suggestion, please email Bob@bobhollick.com.