Safeguards in place for annuity holders

Just as with bank savings, failed insurers' policies have backup coverage

401(k)

Your Money

January 25, 2004|By Julie Jason

Ask just about anybody about FDIC insurance and they will be able to tell you that your savings are insured up to $100,000 if your bank becomes insolvent.

There is also policyholder protection for insolvent insurance companies, and it's important to understand how it works if you're relying on an immediate annuity for retirement. (An immediate annuity is an insurance product that pays a fixed amount, usually for life.)

As with Federal Deposit Insurance Corp. insurance, there are limits to coverage for the policies of failed insurers. But there are some surprises here, as you will see.

Let's look at immediate annuities first, then life insurance.

Most state insurance guaranty associations cover up to a maximum of $100,000 of the present value of immediate annuity obligations.

If the insurance company becomes insolvent, no more than $100,000 will be covered, no matter how much you paid for the annuity.

But take comfort in knowing that in an insolvency proceeding, policyholders take precedence over general creditors when the remaining assets of the insolvent insurer are distributed.

A few weeks ago, we discussed the purchase of a $600,000 annuity that guaranteed the buyer $4,000 a month for life.

In some insolvencies, a $600,000 annuity might be paid off in whole if the company's assets can be maximized by the state-appointed receiver to cover all obligations.

A more typical recovery might be 85 percent of the total value of the annuity, according to Peter Gallanis, president of the National Organization of Life and Health Insurance Guaranty Associations.

In such cases, the receiver may decide to continue paying the monthly annuity payments in full until the money runs out or to reduce scheduled periodic payments in proportion with the company's projected shortfall.

If you buy life insurance, the coverage limit is usually $300,000 in death benefits for any one individual and $100,000 in cash surrender values.

For more information on limits to coverage, go to www.nol hga.com and click on "State Information."

There you will find contact information for your state's insurance guaranty association and the coverage limits that apply in your state.

Also, be sure to read "Seven Key Questions" in the "Insolvency Corner."

Many state guaranty associations have their own Web sites with links from the NOLHGA site.

You can also call NOLHGA at 703-481-5206 for additional information, but your own state's association is the best way to learn about your coverage, since some limits vary from state to state.

No matter where you live, read a booklet called The Consumer's Safety Net, which can be found on the Web site of the Connecticut Insurance Department, www.state.ct.us/cid.

Among other things, you'll learn that if you base a claim on a salesperson's promises or marketing material rather than what's in the contract, you're out of luck.

If you are considering buying a large life insurance policy with a multimillion-dollar death benefit, consider buying smaller policies from more than one insurer.

The same holds true for large purchases of immediate annuities, particularly if you are retired.

Julie Jason is a money manager and retirement finance author who writes for The Advocate of Stamford, Conn., a Tribune Publishing newspaper. Send e-mail to her at yourmoneytribune.com.

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