6 Steps in Evaluating an Annuity

By Compuquotes Team on July 18th, 2008


  • 1. Evaluate the annuity's past performance

Before you choose an annuity, check out that annuity product's track record and past performance. Past trends of profitability and yield are measures of an annuity's strength. The longer the annuity product has been in the market, the more its patrons, the better the sense of how it will fare in future economic conditions.

  • 2. Check out the annuity issuer's track record

Who issued the annuity? Try and research the track record of the issuer, too. The customer support and claims servicing and administration history of the issuer is vital as you would not want to end up with an incapable and incompetent issuer later on.

  • 3. Look at the types of investments in the portfolio

Try and see what kind of investment portfolio the annuity is in. Look at the types of investments being made, how holdings are managed, what kinds of investment strategies are employed, and the level of professionalism and commitment in servicing client claims.

The mix of the portfolio will have to be looked at closely. Some investments may be slow-acting but are able to generate better returns in the long run. Others are fast-moving but subject to greater risks and price fluctuations. Be consistent in the evaluation to be able to establish uniform patterns and trends. Trend analysis is a very important evaluation tool in finding the right kind of annuity for you.

  • 4. Pore over the financial figures

Financial figures speak for themselves, especially so if you are able to validate them and establish trends and patterns. Net profit levels should be tallied vis-a-vis assets and equities to check actual rates of returns. Portfolio quality and profitability will also need to be checked. The kind of income generated and the cost structure determines sound investment-making strategies. Liquidity and solvency are other ratios that need to be checked regularly - over the long term and to respond to upcoming maturities.

Annualized returns are best looked at in more detail through monthly schedules if these are available. Year-to-date figures need to be compared to previous year performance. Sustainability is established through this comparison. Income and cost wise, check for efficiency or inefficiency as this redounds to better or worse bottom lines.

  • 5. Make comparisons and do peer-to-peer analysis

Try and compare your annuity issuer to other issuers of comparative size of resources and operations. Doing peer-based evaluation gives a better feel of the industry in general and your issuer in particular. Tally peer-to-peer performance with industry standards. Know the benchmarks and see if these are lived up to or surpassed. Comparing the issuer allows you also to compare the portfolios and see if performance is mediocre or above average.

  • 6. Research and validate references and contentions

Investment strategies and results of those strategies need to be validated. While strategies and styles differ, they can be sound indicators to help explain why a particular investment will act out of the norm for better or for worse. Check out industry information materials, publications, rating agencies' publications, and other sources to validate your annuity's and annuity issuer's contentions and claims.

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