The economic climate of the past few years has caused consumers to question the certainty of nearly every type of investment product. Doubt is frequently cast toward insurance companies because of their position in the financial framework of our economy in addition to the number of spectacular failures in the banking industry, as mentioned in a recent article on CBSnews.com- read the article here.
This article basically talks about how to take protective measures that go beyond simply choosing to invest with a safe company. I expected to see a little more information regarding how annuities are treated when an insurance company fails but let’s first go over a brief summary of what the article does state.
First of all, a thorough discussion is offered as to how state guaranty associations protect annuity purchasers, much like the FDIC protects bank deposits. It is important to understand the coverage limitations that exist with your home state association. For annuities this will range from $100,000 to $500,000 depending on your state of residence.
Second, the author points out some critical information regarding the difference between failures at insurance companies vs banks. In the author’s words…
It’s hard to start a “run on an insurance company” like a “run on a bank.” While you can always withdraw the money from your bank accounts, you would have to die for life insurance benefits to be paid, and with immediate annuities, you’d have to wait each month to receive your check.
Also of note is the fact that banks are more highly leveraged, thus more susceptible to failure. Generally speaking, an insurance company’s liabilities are not much greater than its assets whereas a bank typically will have liabilities many times the amount of assets on hand. Which seems like more prudent financial management to you?
Lastly, the author offers some simple suggestions as to how you can protect yourself. Research your state guaranty association and keep individual purchases below the limit even if you have to use multiple companies to do it. And, only invest money with highly rated companies who have an excellent track record of conservative management. I know it sounds simple but you can’t even imagine how many people overlook these easy steps.
In this article we found a simple approach that shows why insurance companies are safe and what consumer protections exist. Now let’s also talk about what happens to your annuity if the company does fail.
Most importantly, annuities are backed by a conservative mix of corporate bonds and government treasury notes. Financial hardship is likely unrelated to the general company account that holds annuity assets. In the case of AIG, failure resulted from the company’s exposure to the sub-prime mortgage market. AIG’s fixed assets stayed in tact and annuity payments were made as promised. No consumer lost money from an annuity contract as a result of AIG’s reckless financial management. And that was a big one!
Had the company been allowed to fail without government assistance, the profitable portion of the company assets would have easily been sold to healthy institutions who would have carried the guarantees to term. You see, the problem was never the insurance business but the fact that executives used profits to further leverage the company with extremely risky assets.
When Conseco failed in the mid-90s, profitable lines of business like annuities were sold off to healthy insurers. Visitors to Annuity Straight Talk have showed me two original Conseco contracts issued before the failure that are now owned by separate insurance companies. Those contracts were not negatively affected by Conseco’s troubles and went to term and beyond with all contractual guarantees intact.
Nobody wants to see their insurance company fail but it certainly doesn’t indicate the end of the road. I know how it works. I’ve seen it in action. Annuities are extremely safe, and that’s all there is to it.
Have a great week!
Bryan J. Anderson