What Happens if Your Annuity Provider Fails?
Written by
Karen Doyle
Edited by
Maria Concepcion
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If you have investable assets, you’ve probably heard of annuities. An annuity is a contract between an investor and an insurance company. The investor pays a sum of money (the premium) to the insurance company, either all at once or in a series of monthly payments. The insurance company agrees to pay the investor a series of payments, beginning at a later date, usually for the rest of their life.
Advantages of Annuities
An annuity can ensure you don’t run out of money in retirement. Once the annuity company starts making payments to you, they usually continue for the rest of your life, regardless of the amount of money you invested and the amount of interest earned. In other words, once you annuitize your contract, you’ll get payments for as long as you live, even if the insurance company loses money on you.
If you die before you start collecting your annuity payments, the contract pays a death benefit to your heirs.
Disadvantages of Annuities
The flip side of lifetime payments is that, with a traditional annuity, you get payments for the rest of your life but no longer. Once you start taking payments, the contract has no lump sum value. If you get just one or two payments and then you die, your heirs get nothing. Note that some annuity contracts have a provision for a death benefit, but many do not.
What Happens if Your Annuity Provider Fails
The promise to pay out under the terms of an annuity contract depends on the solvency of the insurance company that wrote the contract. Because an annuity is not a bank deposit, your money is not FDIC-insured as a bank deposit would be.
If you buy an annuity from an insurance company that fails, you do have some recourse. Each state has a guaranty association that protects policyholders when an insurance company fails. There are limits to this coverage, however. The amount you can recover varies by state but is typically about $100,000 per policy. If you have an annuity with a contract value or death benefit of $500,000, you would only get $100,000 if that’s the limit in your state.
It’s important to select your annuity provider carefully, since your contract is only as good as the insurance company’s ability to pay.
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