Credit quality basically refers to overall financial health and the ability of a person or company to fulfill their financial obligations. In other words, can the person or company pay their bills.
Annuity contracts typically involve long-term commitments and guarantees. An annuity purchase can involve large amounts of money and, in return, a contract or promise to provide payments that may commence several decades into the future. As a result, the ability of the insurance company to honor and fulfill their commitments is absolutely critical.
Annuity and life insurance companies in the United States are highly regulated. Insurance regulators have strict and arguably conservative guidelines for financial solvency.
Regulatory guidelines affect the investments that insurance companies are able to make with their funds, the amount of leverage that insurance companies can use, and the amount of reserves that insurance companies must set aside for claims.
All of the above said, there are varying degrees of credit quality within this highly regulated industry, so it is imperative that would be annuity buyers only consider the strongest and most stable insurance companies.
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