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An annuity is an insurance contract itself, designed to provide a guaranteed stream of income. In exchange for either a lump sum or a series of payments, the issuing insurance company promises regular payouts. But what would happen to those payments if the issuing insurer were to, say, go out of business? Rest assured, in that case, certain protections are in place to help safeguard your investment. There are, however, limits on coverage, which vary by state.
Considering an annuity? A financial advisor can help you determine how it may fit in with the rest of your retirement plan.
Are Annuities Protected?
Yes, annuity regulations and protections are offered at the state level. Every state has a nonprofit guaranty organization that each insurance company operating in that state is required to join. In the event that a member company fails, the other companies in the guaranty association must 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:
| State | Coverage Limit |
|---|---|
| Alabama, Alaska, Arizona, California, Colorado, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Vermont, Virginia, West Virginia, Wyoming | $250,000 |
| Arkansas, North Carolina, Oklahoma, South Carolina, Wisconsin | $300,000 |
| Minnesota | $410,000 |
| Connecticut, New York, Utah, Washington | $500,000 |
It’s important to note that when an insurance company becomes insolvent, other companies may purchase their contracts and assume responsibility for annuities that the failing company had previously sold. In that scenario, the guaranty association wouldn’t have to cover the losses. Instead, the customer would simply maintain their annuity, but with a new company.
What Happens If Your Annuity Exceeds the State Coverage Limit?
Annuities exceeding your state’s guaranty limit lose protection above that threshold. If your covered benefits total $400,000 and your state limit is $250,000, the excess $150,000 receives no protection if the insurer fails.
| Annuity Example | Estimated Amount |
|---|---|
| Annuity with one insurer | $400,000 |
| State coverage limit | $250,000 |
| Unprotected amount | $150,000 |
Spreading annuities across multiple insurers can reduce exposure, but coverage depends on contract type and ownership structure. Dividing money among insurers doesn’t automatically protect every dollar. Check your state’s specific rules before assuming multi-insurer diversification solves the problem.
Insurer financial strength determines whether guarantees hold. Review the company’s financial ratings before purchasing. Consider how much retirement savings you’re exposing to a single insurer’s solvency risk.
Protections by Annuity Type
Protections may vary depending on the type of annuity a customer owns. Fixed annuities pay out a defined percentage agreed upon in the contract. Conversely, the returns of variable annuities depend on the performance of investments. A customer can also choose whether they receive payouts immediately (immediate annuity) or defer them until a later date (deferred annuity). The timing and cadence of these payouts can affect the protection available.
It’s also worth noting that while federal protections that bank deposits enjoy do not extend to annuities, the Securities Investor Protection Corporation (SIPC) 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.
Contacting your state’s guaranty association can help you determine how exposed you may be in any particular situation. The National Organization of Life and Health Insurance Guaranty Associations lists contact information for each state organization on its website.
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 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.
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