An annuity is a type of insurance contract that can offer a guaranteed income stream, making them a common investment of retirees. In exchange for a lump sum or a series of payments, an insurance company provides guaranteed returns. While only insurance companies can issue annuities, individuals may purchase them through banks, brokerage firms, and financial advisors. But what happens if the insurance company that issued the annuity goes out of business? Let’s take a look at how annuities are protected.
If you’re interested in boosting your retirement income, a financial advisor can help you figure out how annuities and other investments fit into your finances.
Are Annuities Protected?
The short answer is yes. Annuities are regulated and protected at the state level. 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. are protected up to $300,000, while those in Puerto Rico are protected up to $100,000.
The table below breaks down the coverage limits for each state:
|Annuity Protection By State|
|Alabama, Alaska, Arizona, California, Colorado, Delaware, Florida, 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, Rhode Island, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, West Virginia, Wyoming||$250,000|
|Arkansas, Georgia, North Carolina, Oklahoma, Pennsylvania, South Carolina, Wisconsin||$300,000|
|Connecticut, New Jersey, Washington||$500,000|
|New York||$1 million|
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.
Protections Could Vary By Annuity Type
Annuities come in all shapes and sizes. Fixed annuities pay out a defined percentage agreed upon in the contract, while the returns of variable annuities are tied to the performance of investments. A customer can also choose whether they receive payouts immediately (known as an immediate annuity) after delivering a lump sum or defer their payments until a later date (called a 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 your annuity may be in the event the issuing company goes under. 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.
Annuities are insurance contracts that some people purchase to ensure that they have an income stream. While annuities are not insured by the federal government, guaranty associations in all 50 states cover at least $250,000 in annuity benefits for customers if the insurance company that issued the contract goes belly up. Annuities in New York are protected up to $1 million.
Tips for Retirement Planning
- A financial advisor can help you create a retirement plan that meets your needs. If you’re considering hiring an advisor but don’t know where to start, SmartAsset’s free matching tool can pair you with up to three advisors in your area. 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.
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