Bonds have traditionally been used for safety and security in the investment world. Watch the video below to learn more about what happened to bonds this year!
Many Savers get very confused by bonds. Most are unsure what bonds really are.
Simply, a bond is a fixed income instrument – commonly used by governments or companies to raise money by borrowing from investors. In return, the issuer of said bond promises to pay back the investment, with interest, over a certain period of time. With rising interest rates in 2022, bond values and funds tied to bonds have decreased in value. This is called interest rate risk.
Ironically, annuity products are backed by an insurance company’s investments in bonds. HOWEVER, annuities are NOT subject to interest rate risk. In other words, they cannot go down in value due to the stock market going down (market risk) or interest rates going up (interest rate risk) like bonds.
So, you ask, “How can insurance companies have all these bonds and at the same time, not lose any money?”
Well, they put the bonds in what I would call a ‘wrapper’ so that if any of these individual bonds go down, it doesn’t affect what they’ve guaranteed in the contract. They can protect their chance of loss by including surrender charges within the contract.
Additionally, companies are able to provide you ‘some’ of the gains when the stock market goes up (based on your index and crediting methods), but also principal protection for when (not if) the stock market goes down.
So again, annuities are backed by an insurance company’s investment in bonds, but they’re not the same as owning an individual bond.
Watch the video above to hear Tony explain the difference between owning a bond and an annuity protected by a bond!