Are your variable annuities safe?

"The companies issuing these guarantees (to variable annuity owners) have been fairly effective at offsetting some of their losses through the use of hedging," he says, noting no such underwriters have been sent into state receivership during the current downturn. "A number of companies have been downgraded, but in many cases they're being lowered from one high rating to another high rating."

Many of the variable annuity writers, he adds, are part of "large, diversified organizations with substantial financial resources."

Nevertheless, several life insurance companies have assembled in a queue to apply for bailout money from the Troubled Asset Relief Program, or TARP, a sign that all is not well in the industry. Should consumers be alarmed?

Safety net

Like life insurance policies, annuities enjoy multiple layers of consumer protection.

For starters, companies that sell annuities are regulated under state insurance laws and required to maintain significant cash reserves.

All states, the District of Columbia and Puerto Rico also have guaranty funds to protect contract owners against insurance company insolvency.

Though actual coverage provided for annuity contracts varies by state, cash value and annuity benefits generally are protected for between $100,000 and $500,000.

As with life insurance policies, if the value of your annuity benefit exceeds that amount, you would be eligible to make claims against the estate of the failed life insurance company, which would use its reserves to make policyholders whole ahead of other creditors.

Because they are considered a security, variable annuities are regulated more closely still. The Securities and Exchange Commission along with the Financial Industry Regulatory Authority, or FINRA, oversee firms that sell such contracts.

If you own a variable annuity with a living benefit -- or guaranteed protection of the principal investment -- and your insurance company goes under, which is rare, your protection may come from two different sources, according to the National Association of Variable Annuities.

First, those who purchase variable annuities allocate payments toward a subaccount of stocks and mutual funds, which is held in the insurer's separate account.

The assets in that account are insulated against the creditors of the insurance company in the event of the company's collapse. It belongs to you. In some states, annuity assets are shielded from a contract owner's creditors as well.

Keep in mind that the investments you select within that subaccount, which rise and fall according to market performance, are not insulated against loss.

Secondly, funds and guarantees for variable annuity living benefits are paid by the insurance company itself. Should it go under, your contractual obligations and annuity benefits would be covered by the state guaranty fund up to the maximum limit.

Protect yourself

While numerous safeguards exist to protect policyholders in the event their life insurance companies suffer financial hardship, Martin says it's important for individuals to evaluate their policy and annuities to be sure they still meet their needs.

"In the vast majority of cases, the answer is going to be yes," he says, noting it may help to consult a financial adviser. "Consider one policy at a time in light of your individual circumstances. There are certain companies that are going through hard times right now, but overall we believe the system will weather the storm."


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