An annuity is an insurance contract designed to provide a guaranteed stream of income, making it a popular choice among retirees. In exchange for either a lump sum or a series of payments, the issuing insurance company promises regular payouts. While only insurance companies can issue annuities, they are often available for purchase through banks, brokerage firms and financial advisors. And if the issuing insurer were to go out of business, certain protections are in place to help safeguard your investment.
Considering an annuity? A financial advisor can help you determine where an annuity might fit in with the rest of your retirement plan.
Are Annuities Protected?
Yes, annuity regulations and protections are at the state level. And every state has a nonprofit guaranty organization that each insurance company operating in that state must join. In the event that a member company fails, the other companies in the guaranty association help pay the outstanding claims.
Coverage limits vary by state, but all 50 state organizations protect at least $250,000 per customer, per company. Annuities in Washington D.C. have $300,000 of protection, while those in Puerto Rico get $100,000 in coverage.
The table below breaks down the coverage limits for each state:
Annuity Protection By State
| State | Coverage Limit |
| Alabama, Alaska, Arizona, California, Colorado, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, West Virginia, Wyoming | $250,000 |
| Arkansas, North Carolina, Oklahoma, South Carolina, Wisconsin | $300,000 |
| Connecticut, New Jersey, New York, Washington | $500,000 |
It’s important to note that when an insurance company becomes insolvent, other companies may purchase their contracts and assume the responsibility for annuities that the failing company had previously sold. In that scenario, the guaranty association wouldn’t have to cover the losses. A customer with an annuity with the now insolvent company would simply maintain their annuity, but with a new company.
Types of Annuities
Annuities come in several forms, each designed to meet different financial needs and risk preferences.
Fixed annuities provide a guaranteed rate of return over a specific period. The insurance company agrees to pay you a predetermined amount, offering stability and predictable income. These are ideal for conservative investors looking for low-risk, steady payments.
Variable annuities offer the potential for higher returns by tying your payments to the performance of investment sub-accounts, similar to mutual funds. While they provide upside potential, they also carry market risk, and returns are not guaranteed. These annuities are better suited for investors comfortable with market fluctuations.
Indexed annuities bridge the gap between fixed and variable options. They earn interest based on the performance of a market index, like the S&P 500, while typically offering a minimum guaranteed return. This allows for modest growth with some protection against market losses.
Annuities can also be categorized by when they start paying out:
- Immediate annuities begin distributing income shortly after a lump-sum payment is made, often within a year. They’re commonly used by retirees seeking immediate cash flow.
- Deferred annuities delay payments until a future date, allowing the investment to grow tax-deferred. This type works well for those planning ahead for retirement income.
Each annuity type has unique features, benefits and risks. A financial advisor can help you decide which structure aligns with your retirement goals and income needs.
Protections by Annuity Type
Fixed annuities pay out a defined percentage agreed upon in the contract. Conversely, the returns of variable annuities come on the basis of the performance of investments. A customer can also choose whether they receive payouts immediately after delivering a lump sum (immediate annuity) or defer their payments until a later date (deferred annuity). As a result, protections may vary depending on the type of annuity a customer owns.
It’s important to contact your state’s guaranty association to determine how exposed you may be in this situation. The National Organization of Life and Health Insurance Guaranty Associations lists contact information for every individual state organization on its website.
While federal protections that bank deposits enjoy do not extend to annuities, the Securities Investor Protection Corporation does protect variable annuities purchased through private brokerage firms. SIPC, a federally-mandated nonprofit organization, will cover up to $250,000 in variable annuities in the event the brokerage firm that sold the contract becomes insolvent. However, the SIPC does not protect fixed annuities or any loss in value that a variable annuity experiences as a result of its underlying investments.
Bottom Line
Annuities are insurance contracts that some people purchase to ensure that they have an income stream. While annuities don’t have federal government insurance, guaranty associations in all 50 states cover at least $250,000 in annuity benefits for customers. This is specifically for if the insurance company that issued the contract goes out of business.
Tips for Retirement Planning
- A financial advisor can help you create a retirement plan for the future. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Do you know how much you need to retire? Use SmartAsset’s retirement calculator to find out if you’re on track.
Photo credit: ©iStock.com/eggeeggjiew, ©iStock.com/g-stockstudio, ©iStock.com/flyzone