Recent stock market declines forced Manulife Financial to borrow $3 billion from the Canadian banks. This brings to mind one of the risks of buying any type of annuity including IncomePlus: default by the insurance company.
The main drawback of IncomePlus is the high fees and the likelihood of not keeping up with inflation. On the positive side is the protection from a prolonged decline in stock prices. If stocks perform poorly for a long time, customers of IncomePlus will get a steady income eroded by inflation, but at least it wouldn’t drop in absolute terms.
But if this doomsday scenario for stocks plays out, all IncomePlus customers will be leaning on the insurance guarantee all at once. What happens if Manulife runs out of money? Existing regulations require Manulife and other insurance companies to maintain certain financial reserves, and this was the reason for the $3 billion loan.
If stock prices really do decline for a long time, creditors will eventually stop lending Manulife more money. I don’t know how deep the decline would have to be to cause Manulife to default on its promises, but this is something that potential customers should know before handing over their life’s savings.
This doesn’t apply only to Manulife. Any person who considers buying any type of annuity should understand exactly what entities are backing it, and whether they are strong enough financially to make good on their promises.