Yesterday, I wrote about the safety of pensions.  A few days prior to that I received this email from Sue, a friendly Wealth Pilgrim:

“What happens to folks who have their retirement funds in annuities?  If the insurance companies are threatening to go belly up, won’t some of these annuities be threatened?”

I have a 3-part answer to this.

First, you must find out if the insurance company holds your money in their general or separate account.  If they hold it in the general account and they go bankrupt, get in line.  You become a general creditor of the company.  Depending on what state you live in, your account could have some guarantees set up by the guarantee fund.  But lets face it.  A guarantee today isn’t the same today as it was a year ago.  I wouldn’t bet on those guarantees.  I don’t say this to scare you.  I say it because if a big insurance company suddenly starts taking on water, the guarantee fund will probably go under as well.

If your money is held in a separate account, your assets are protected from the claims of the other insurance company’s creditors.  This is a much better position to be in.

So the most important action step for you to do is find out which account your money is held in.

Now, if you have “annuitized” your annuity – selected a stream of payments for some period of time – the same holds true except you don’t have the guarantee fund backing you up.  Just want you wanted to hear….eh?

When I started in this business, insurance companies used to buy other insurance companies that ran into trouble.  I’m not so sure that would happen today.  I’m also not so sure I’d rely on the state guarantee fund either.  So what is an investor to do?

1.  If you have an annuity, make sure the company is as safe as possible. Call the company and ask for ratings report in writing or go to their website to learn more.  If need be, move your money to a safer company and one that will keep your money in a separate account.

2.  If you have already annuitized your annuity – good news.  You don’t have to do anything – because you can’t.  Once you’ve made the decision to annuitize you can’t do anything about it so it makes no sense to worry.

3.  If you don’t have any annuities – don’t buy any.

I’ve never liked annuities because I’ve rarely seen them work out for clients.  Of course this isn’t always the case….its just my experience.  In all fairness, I must tell you  that during the Great Depression,  many investors were saved because they had cash value life insurance.  It was the one investment that held up better than just about everything else.

However, I don’t think its safe anymore to rely on the past as any indication.  We live in a brand new world.

What do you think?  Do you have any annuities?  Have you had any good or bad experiences with insurance companies?

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