Are Annuities Guaranteed by the Government?
Annuities are insurance products that are designed and sold by life insurance companies. These products guarantee an income to you during retirement. The annuity contract can defer the payments, however, until a time you specify. If the insurer does this, it is known as a deferred annuity. Annuities are guaranteed by state governments. Make sure you understand how you are protected.
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Function
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State governments guarantee your annuity contract through state guaranty corporations. Each state has its own guaranty corporation. The function of this entity is to guarantee your annuity account. If an insurance company cannot pay its guarantees, the government agency steps in to pay you your money.
Significance
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The significance of this state guaranty corporation is that the corporation is able to cover some or all of your annuity balance if an insurer cannot pay its claims. In this way, the guaranty corporation acts like the FDIC for the insurance industry.
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Benefit
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The benefit of a state guaranty corporation is that you don't need to worry about the financial strength of an insurance company. You are certain to receive a state set minimum return of your annuity account. This means that, even if an insurer fails, you won't lose money.
Disadvantage
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The disadvantage of the state guaranty corporation is that the minimum level of return you will get varies by state. Some states provide $300,000 of protection, for example, while others provide $500,000. If you have more in your annuity than what it covered, you won't receive this money back if the insurer fails.
Misconception
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Even though the state guaranty corporation is run by the state, it is funded by insurance companies of the state. Insurance companies are forced to contribute to the guaranty fund. This, in turn, raises the cost of doing business for the insurer and could translate into raising fees on annuities to cover the cost of contributing to the state fund.
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