EDITOR'S NOTE: This article was originally published in the November 2008 issue of Kiplinger's Retirement Report. To subscribe, click here.
Ever since American International Group's financial troubles became news, we've been inundated with questions from readers about the safety of their annuities. The company underwrites the popular Vanguard immediate annuity, in addition to annuities with AIG Retirement, AIG SunAmerica, Variable Annuity Life Insurance Co. (VALIC) and other names.
Regulators say AIG insurance policies and annuities are safe for now, and consumers have protection if AIG's insurance subsidiaries became insolvent. AIG has many lines of business, but the insurance subsidiaries are subject to special rules. States require insurers to set aside enough capital to pay claims and make annuity payouts.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
AIG's life-insurance subsidiaries currently have an A rating from A.M. Best. Still, the ratings firm says the subsidiaries are "under review with negative implications," which means it's monitoring the situation. "At this point, the insurance subsidiaries have an excellent ability to pay claims," says Andrew Edelsberg, a vice-president in A.M. Best's life/health ratings division. You can check A.M. Best ratings at kiplinger.com/money/insurance.
The safety of an annuity depends in part on the type of product. Payouts from a fixed annuity or from an equity-indexed annuity come from the insurer's general account. So if you hold one of those annuities, keep an eye on the insurer's financial strength.
If you have a variable annuity, the money is segregated from the insurer's assets and invested in mutual funds in your own account. However, if your variable annuity has a guaranteed minimum benefit, that benefit is paid from the company's general account; the benefit, though not your account balance, could be jeopardized if a company became insolvent.
Before a company ever reached that point, you would still be protected. AIG, for example, would probably sell some of its subsidiaries to other insurers, and you could end up with a stronger company.
State guaranty associations would jump in if the insurer became insolvent. These associations must provide at least $300,000 in life-insurance death benefits, $100,000 in cash surrender or withdrawal value for life insurance, and $100,000 in withdrawal and cash values for annuities. Sixteen states have limits of $300,000 or $500,000 for annuities.
Peter Gallanis, president of the National Organization of Life and Health Insurance Guaranty Associations (www.nolhga.com), says people generally get more than the state limits. In most cases, the insurer pays from its reserves and the state covers any gap. He also says that immediate-annuity payouts would continue without a break.
If you're thinking about buying an annuity that is larger than the state coverage, consider purchasing several smaller ones from several insurers. Each company would be covered by the state separately.
Costs of Switching
Regulators warn that agents looking for commissions have been trying to persuade owners of AIG annuities to switch out. "If someone tells you to replace any policy because AIG is in trouble and may not be able to pay your claim, that is not only untrue, it is against the law," said Eric Dinallo, New York's insurance superintendent, in a statement to policyholders.
If you cash out the annuity, you'll have to pay taxes on your earnings, plus an early-withdrawal penalty if you're under age 59 1/2. You can make a tax-free exchange to another annuity, but you may have to pay a hefty surrender charge.
Owners of a variable annuity with a guaranteed minimum benefit should tread carefully. These annuities promise returns of 3% or more no matter how your investments perform. To qualify, you may need to keep the annuity for several years or take the money as a lifetime income stream. If you move the annuity to another insurer, you would lose the guarantee. "Understand how the contract works before taking out your money," says Glenn Daily, an insurance adviser in New York City.
For more authoritative guidance on retirement investing, slashing taxes and getting the best health care, click here for a FREE sample issue of Kiplinger's Retirement Report.
-
403(b) Contribution Limits for 2024retirement plans Teachers and nonprofit workers can contribute more to a 403(b) retirement plan in 2024 than they could in 2023.
-
SEP IRA Contribution Limits for 2024SEP IRA A good option for small business owners, SEP IRAs allow individual annual contributions of as much as $69,000 a year.
-
Roth IRA Contribution Limits for 2024Roth IRAs Roth IRA contribution limits have gone up for 2024. Here's what you need to know.
-
SIMPLE IRA Contribution Limits for 2024simple IRA The maximum amount workers at small businesses can contribute to a SIMPLE IRA increased by $500 for 2024.
-
457 Contribution Limits for 2024retirement plans State and local government workers can contribute more to their 457 plans in 2024 than in 2023.
-
Roth 401(k) Contribution Limits for 2024retirement plans The Roth 401(k) contribution limit for 2024 is increasing, and workers who are 50 and older can save even more.
-
Where To Invest Your 401(K)Knowing where to invest your 401(k) money can be difficult. Here, we rank 10 of the largest retirement funds.
-
Is a Medicare Advantage Plan Right for You?Medicare Advantage plans can provide additional benefits beneficiaries can't get through original Medicare for no or a low monthly premium. But there are downsides to this insurance too.
