What backs the guarantees of an insurer’s fixed annuities?

The guarantees of an insurer’s fixed annuities are backed by the general account assets of the insurance company. This means that the insurance company uses its overall financial reserves, which include various assets, to ensure that it can meet its obligations to annuity holders. These assets typically consist of conservative investments such as bonds and mortgages, which are intended to preserve capital while providing a stable return. By relying on the general account, policyholders can feel confident that the company has the financial stability to honor its commitments regarding fixed annuities, such as guaranteed payments.

In contrast, while policyholder premiums contribute to the overall funding of the insurance company, they do not directly back the guarantees of fixed annuities in isolation. Commissions from sold annuities are part of the company’s operational expenses and do not provide any backing to the guarantees; they are costs incurred to facilitate the sale of products. Finally, investment in stocks typically carries more risk and fluctuates in value, making them unreliable as a backing for the guarantees associated with fixed annuities, which rely on stable and predictable income to meet guaranteed payouts.