July 14, 2009

What if the Insurance company holding your Life Insurance or Annuity fails?

I've been looking at annuities as part of a retirement plan. One of the concerns that I've occasionally heard about annuities is the fear that if the insurance company that you buy the annuity contract from fails that you might lose your retirement money. Say that someone retired 5 years ago and had bought an annuity from AIG. What would happen to that persons investment if AIG went bankrupt? Thats a scary idea isn't it? I'd hate to buy an annuity with an insurance company only to see them go under some years down the road and then lose all my money. Thankfully you don't need to worry too much.

There is a guarantee on life insurance and annuity contracts issued by insurance companies that is backed by a state guarantee association. Each of the 50 states and D.C. has a guarantee association. They are organized nationally as the National Organization of Life & Health Insurance Guarante Associations (NOLHGA)

Each states guarantee association acts a little differently. But generally the idea is the same. The state guarantee association acts to back life insurance policies and annuities much like the FDIC backs bank accounts. In the case that an insurance company becomes insolvent the state guarantee association will step in to help cover it.

Here is their informational brochure that addresses consumer questions about how it works.

Quoting from the brochure, here are a couple key points:

"What happens when my insurance company goes out of business as a result of insolvency?
Insurance companies that experience severe financial difficulties are taken over by the insurance department of the state in which they are based,and that state’s insurance commissioner becomes the “receiver.” If the company is determined to be insolvent, it may be liquidated. When a liquidation is ordered by a court, state guaranty associations work with the receiver to pay covered claims directly or transfer the policies to a financially sound insurance company."

"How much protection do I have?
Like the FDIC, state guaranty associations have maximum benefit limits. These limits are established by state law and can vary from state to state, but most states provide at least:
• $300,000 in life insurance death benefits
• $100,000 in cash surrender or withdrawal values for life insurance
• $100,000 in withdrawal and cash values for annuities
• $100,000 in health insurance policy benefits"

Those are the minimums and some states offer higher coverages maximums.

Basically the bottom line is that if your insurance company goes bankrupt then you will be covered up to the amounts listed above. This is certainly some protection so that we all don't have to worry so much about an individual insurance company failing. If for example you had a $75,000 annuity with AIG and you were worried about them failing then you shouldn't sweat it since that amount is guaranteed by your state guarantee agency.

If you have amounts above the limits in an individual insurance company then it would be a smart move to diversify with multiple insurance agencies. Instead of buying a single $200,000 annuity from one insurance company consider buying two $100,000 annuities via two separate insurance companies. That way if one of them fails then you'll be covered to the maximum value of the annuity.

Again, each state is a little different so for the exact details on your state go to the NOLHGA site and find the link to your states agency. Depending on the state, you're going to have at least the protections listed from the QA above but you might have more than that.

Bottom line: Life insurance and annuities are guaranteed by state agencies up to $100,000 for cash value or annuity policies and $300,000 for life insurance death benefits.

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