Annuity contracts are the investment equivalent of a stodgy old sedan. They're safe, but not very exciting. Their primary virtue is that they guarantee a minimum monthly payout during your retirement. It's important to verify that your annuity company is financially sound, because those guarantees can be problematic if it goes into bankruptcy.
A Variable Annuity Primer
Annuities are a sort of inside-out life insurance policy. Instead of paying out a lump sum when you die, they provide you with a regular monthly income for as long as you live. Traditional annuities do this by pooling your money in the insurance company's internal investment portfolio, which is required by law to be conservative. That means it's relatively safe, but provides low returns. Variable annuities provide the potential for better returns by investing your money in mutual funds and similar conventional vehicles. This means you might lose money in a down market, so some contracts offer a guaranteed minimum return.
Unfortunately, those guarantees depend on your company remaining solvent. If the insurer fails, the picture becomes much more complicated. That doesn't necessarily mean your money is lost forever. Each state requires its insurance companies to pay into a state-operated fund that essentially insures the insurers. If your company fails, the state's guaranty fund will make good on your losses, up to specified maximums. Variable annuities have a further level of protection. They're considered securities for regulatory purposes, meaning they're overseen by the Securities and Exchange Commission (SEC) and backed by the Securities Investor Protection Corporation (SIPC).
If you're still paying into your annuity, continue making payments while the bankruptcy is resolved by regulators. This keeps your annuity contract in force. That's important, because the best-case scenario is that a more financially stable insurer will take over your annuity. The new insurer gains a long-term client, and you'll get the retirement income you'd originally planned on. If that doesn't happen, your state's guaranty fund will replace the value of your annuity up to its stated limit, typically $100,000. With a variable annuity that extends only to the guaranteed minimum payment portion of the contract.
For amounts greater than your state's guaranty fund will cover, you can turn to SIPC for an additional level of reimbursement. SIPC will cover up to an additional $500,000 per investor, of which up to half can be in the form of cash held within the annuity contract. SIPC doesn't protect you from any downturn in the market while your affairs are settled. If you're still out of pocket after this, your state's guaranty association can attempt to recover further funds from the insurer's bankruptcy proceedings.
- U.S. News Money: When Insurers Go Bankrupt, Who Gets Paid?
- U.S. Securities and Exchange Commission: Variable Annuities -- What You Should Know
- National Organization of Life & Health Insurance Guaranty Associations: Frequently Asked Questions
- Financial Industry Regulatory Authority (FINRA): Your Rights Under SIPC Protection
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