Annuity State Guaranty Coverage
Unlike bank deposits and CDs, annuities are not covered by federal (FDIC) insurance designed to protect consumers from the consequences of the issuing company’s insolvency. Insurance companies are regulated at the state level, however, and each state has a guaranty fund intended to protect policyholders and beneficiaries of a company that goes bankrupt.
The Annuity State Guaranty Fund Model
Each state’s fund is unique, but all are based on the model developed by the National Association of Insurance Commissioners (NAIC). When an insurance company is placed in liquidation, the insurance commissioner of the state in which the company is domiciled becomes the receiver. The receiver is responsible for gathering the firm’s assets and enumerating its liabilities. In particular, the guaranty fund becomes responsible for paying policy claims up to the limits established by the fund.
Like bank deposits, insurance policy benefits are insured up to certain limits. Limits are set for each individual policyholder or beneficiary. These limits vary by state and by the line covered. A common limitation is $100,000 in benefits; limits range upward to $250,000, $300,000, $500,000 and the $1,000,000 limit applicable in New York. A table showing the limits for each state and the phone number of the state’s insurance department can be found here.
The Two Guaranty Funds
Most states actually have two funds, one for property and casualty lines and another for life and health. Annuity products are covered by the latter. The NAIC model suggests an annuity state guaranty limit of $250,000 in present value for fixed annuities and the guaranteed portion of variable annuities. (The funds do not cover any portion of a policy in which the holder bears the investment risk.) $300,000 is the recommended limit for life insurance death benefits, disability income insurance benefits and long-term-care insurance benefits, with $100,000 suggested for cash-surrender or withdrawal values on life policies.
Annuity contracts are sometimes bought en masse by retirement plans. Some states extend annuity state guaranty coverage to these plans, with $5 million dollars being a typical limit. Guaranteed investment contracts are sometimes covered, but more often not. Most states set a cap (usually $300,000) in total benefit coverage for an individual holding multiple policies with an insolvent company.
Accounts Exceeding the Policy Limit
An individual whose policy value exceeds the state guaranty fund limit is not without recourse. He or she can seek general-creditor status for the remainder of the claim and hope to recover in whole or part when the company’s assets are liquidated.
Insurance Company Assessments
State guarantee coverage is funded by assessments collected from all insurance companies doing business in a particular state. The percentage assessment averages about 2% and is based on each company’s share of premiums collected. The company can recover most of the assessment by using it offset state premium taxes. In all states except New York, assessments are collected only after insolvency is declared. New York, the only pre-assessment state, accumulates larger sums in its state guaranty fund than do other states.
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The Record of the Annuity State Guaranty Funds
The state guaranty funds began in 1969. In their first 30 years, funds paid out only $11 billion. Insolvencies increased over the next 5 years and claims payouts rose accordingly. Research has uncovered only a few instances in which an annuity state guaranty fund paid out less than full value to annuity holders. This record compares very favorably with that of the FDIC, which has dealt with well over 100 bank failures since 1994, many of them resulting in losses to account holders whose total holdings exceeded FDIC limits.
Better Safe Than Sorry
Nonetheless, annuity state guaranty funds are not a security blanket for investors, since the value accumulated in an annuity contract could easily exceed the state’s policy limit. For example, a single-premium immediate annuity might carry a premium of between $50,000 and $2 million. (Purchases above $1 million usually require review by company management.) Moreover, the red tape involved in a bankruptcy might potentially tie up the annuity holder’s money for an extended period of time. Most states forbid advertising the existence of the fund, for fear of creating a moral hazard.
Annuity holders should always exercise due diligence by verifying the insurance company’s financial strength before purchasing an annuity contract. As is the case with FDIC deposit insurance, the annuity state guaranty fund is not designed to indemnify annuity holders against any and all losses due to company bankruptcy. Rather, its goal is to prevent the investor from being wiped out completely. So far, the funds have fulfilled that aim very well.
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