States regulate annuity security


August 12, 2008|By EILEEN AMBROSE

Many people are worried about the security of their money on the heels of the third-largest U.S. bank failure last month.

But Carl of Perry Hall says he is worried about something else.

"What concerns me more so are funds that I have tied up in insurance company annuities," he writes in an e-mail. "These funds represent about one-third of my capital assets."

Deposits at banks, of course, are insured by the Federal Deposit Insurance Corp. What protection, Carl wonders, is there for insurance companies and their customers?

When an insurer can no longer meet its future obligations, regulators step in to try to turn it around, find a healthy insurer to take over the business or to liquidate the company. Meanwhile, there's a guaranty association in every state that continues to pay residents' claims or annuity checks for the insolvent insurer.

But the guaranty association protects you only up to a point. And that point varies from state to state.

The Maryland Life & Health Insurance Guaranty Corp., for instance, will cover residents up to $100,000 of the present value of the annuity, $300,000 in death benefits and $300,000 in health benefits. (If you split your time between two states, you might not be considered a Maryland resident and your protection would be based on the other state's laws.)

Guaranty associations don't operate like the FDIC, which regularly collects premiums from banks and holds billions of dollars in reserve in case of a bank failure.

The guaranty associations generally are not prefunded. That means once an insurer is declared insolvent, the guaranty association goes to other insurers selling similar lines of business in the state to collect an assessment. That money goes into a fund to continue payments to the insolvent company's policyholders and annuity contract holders.

"That can mean delays in some big insolvencies," says Robert Hunter, director of insurance for the Consumer Federation of America. And some states have been stingy on how they determine how much consumers should receive, he says.

Delays shouldn't happen in Maryland because the guaranty association has enough money on hand to keep up with claims and annuity payments in the short term while it collects the assessment, says John Boritas, executive director of Maryland's guaranty association.

In cases where regulators liquidate the business or can't find another insurer to take it over, the guaranty association will continue fulfilling the obligations of the company for years. Boritas says his group will be making payments until 2019 to Marylanders who purchased annuities from Executive Life Insurance Co., which failed in the early 1990s.

Of course, your best protection is not ever going through an insolvency in the first place. And to avoid that is to make sure you buy your policy or annuity from a strong insurance company.

You can check on the health of an insurer through rating companies such as A.M. Best Co., The Ratings, Moody's Investors Service, Fitch Ratings and Standard & Poor's.

Rating companies analyze the financial strength of insurers. Find ratings on thousands of insurers online on the rating companies' Web sites.

"It might be a good idea to look at all of them if you are putting in a significant amount of money," Hunter says.

Stick with the highest-rated insurers. Ratings are an opinion by analysts, and those ratings can change over time.

Hunter advises checking the company's rating every couple of years to make sure it is still highly rated. Rating downgrades are usually a bad sign.

Robert Hafner, associate director with Standard & Poor's, says a downgrade does not necessarily mean "that the company is a disaster."

Sometimes many insurers drop a notch because of changes in the economy or credit markets or because of increased competition in the industry, he says.

Don't just consider an insurer's rating, adds Tom Rosendale, assistant vice president with A.M. Best.

Whatever product you are buying, make sure the insurer has a successful track record in that line and that it is part of the insurer's core business, he says. That way, there will be less of a chance that the company would sell off that part of the business to another insurer with fewer resources behind it, he says.

To suggest a topic, contact Eileen Ambrose at 410-332-6984 or at

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