What Occurs When the Insurer of Your Annuity Faces Bankruptcy?

If your annuity insurer files for bankruptcy, state guaranty associations can offer some protection by covering a portion of your investment, depending on state limits. While immediate effects may differ, payments could be delayed or altered. Stay informed about your rights, diversify your insurers and consult a financial advisor for guidance.

Understanding the Risks of Annuity Providers

Retirees are increasingly considering annuities as a primary income source in retirement, and for good reasons. In 2023, annuity sales reached a record high of $385 billion, showcasing the growing appeal of these financial products. Annuities offer the security of a bank account combined with the reliability of steady treasury bond payments. 

“Annuities are financial products that provide regular payments to individuals, often used for retirement income,” says Daniel Ray, founder at PinnacleQuote in Jacksonville, FL. “Insurers manage these products by investing the funds and guaranteeing the payments. In fact, these companies must maintain reserves to meet their obligations, but sometimes, despite regulations, financial difficulties arise and insurers can go bankrupt.”

Even guarantees can falter, especially when an annuity provider faces bankruptcy. Take the case of Executive Life Insurance, which became insolvent in 1991 following a U.S. Government Accountability Office report highlighting issues in its investment portfolio, including risky junk bonds. After a lengthy struggle with regulators, ELI ultimately paid annuity holders only about 30 cents on the dollar.

Annuity providers can also go bankrupt due to more conventional business challenges. 

“Mismanagement, policy underpricing or sudden large claims can put an insurer out of business,” says Mark Hirsch, a personal injury lawyer at Templer & Hirsch in Fort Lauderdale, FL. “Bad financial planning or changes in the market, like huge natural disasters, can also drain an insurer’s assets.”

Smaller companies or ones with fewer rules are more likely to be affected, “though it doesn’t happen often,” Hirsch adds.

Of course, any financial carrier may face hardship and declare bankruptcy. My experience tells me that more banks have gone through bankruptcy than insurance companies. Most insurance companies are taken over by another, and annuitants are protected by their products. A good, rated company is another way a consumer can choose a carrier with strong financial and rating strengths. Sharing this with a client is good practice, and making sure you choose a sound company generally safeguards against loss in bankruptcy. In my 33 years of working with annuities, no one has had to file a claim against a bankrupt annuity company.

Aamir M. Chalisa, MBA, LUTCF, MDRTGeneral Manager at Futurity First Insurance Group

Aamir M. Chalisa is the GM at Futurity First, leading Oak Brook’s top branch. With 30+ years’ expertise, chairs GAMA Global, driving diversity worldwide.

What Happens to Annuity Holders When Providers Go Bankrupt?

Although insurance industry bankruptcies are rare, they happen often enough that state regulators and private sector companies have established safeguards to protect annuity consumers.

“Insurance companies have to invest very conservatively. Insurance companies generally invest approximately 60% to 80% of their funds in long-term, highly rated bonds,” says Craig Kirsner, president of Kirsner Wealth Management in Coconut Creek, FL. “They typically also invest in mortgages and a small portion in stocks. It’s a very conservative mix of investments.”

“Consequently, very few insurance companies ever go bankrupt due to the conservative nature of their investments,” Kirsner notes.

Even so, annuity providers and regulators can mitigate much, but not all, of the damage. “Insurers manage annuity products by investing the funds and guaranteeing the payments,” Ray says. “These companies must maintain reserves to meet their obligations, but sometimes, despite regulations, financial difficulties arise and insurers can go bankrupt.”

Bankruptcies often arise without warning, so annuity owners need to be prepared.

“When an insurance company goes bankrupt, typically there is no immediate impact on annuity holders in the short-term,” Kirsner says. “Usually, the other insurance companies take over all the assets and liabilities the insurance company had. If that doesn’t happen, the state guaranty association will take over the insurance company.”

Each state has a state guaranty association to protect annuities, life insurance and long-term care policyholders. “In Florida, for example, each annuity owner is insured by the Florida state guaranty association for $250,000 of cash value per contract owner, per insurance company,” Kirsner notes. “Life Insurance policies are also insured up to $300,000 of the death benefit.”

The immediate impact of an annuity company collapse on retirees holding annuities can vary, but payments may be delayed or temporarily halted.

“State guaranty associations step in during these situations, protecting up to certain limits to ensure policyholders don’t lose their investments,” Ray notes. “Overall, these associations offer a safety net, but the amount they cover depends on the state and the specific policy.”

Furthermore, another company may take over the policies if an insurer becomes insolvent. “This transfer often ensures that annuity payments continue, although there may be some modifications or delays,” Ray adds. “It’s essential for annuity holders to understand their legal rights in these situations, as they can help guide the process of recovering funds or resuming payments.”

Protecting Your Annuity Investments

Annuitants can count on industry and state regulators to help minimize post-provider bankruptcy losses, but they can also help their own cause through multiple—but vital—mitigation steps.

Understanding Your Rights During Bankruptcy

Retirees and other annuity owners should learn what rights they have when faced with a provider bankruptcy.

“We advise clients during such crises to stay calm, know the limits of state guaranty associations, and explore other protective steps, like diversifying annuity products across different companies,” Ray says. “Above all, understanding these potential outcomes helps safeguard investments in the long term.”

Understanding Your Rights as an Annuity Holder

Annuity holders may experience delays in receiving payments, and the amount they receive could change during the transition to a new insurer. “Legally, annuity holders have rights that offer protection, such as the right to receive payments,” says Randy VanderVaate, a licensed insurance agency owner based in Dallas, Texas. “You may also be able to file claims as part of the bankruptcy process.”

Evaluating Your Annuity Provider’s Stability

The more robust your annuity providers’ track record, the better.

“With so much at stake, I prefer only to use A-rated or better insurance companies as rated by A.M. Best rating company,” Kirsner says.

Why Diversifying Annuities Matters

No rule says you have to put all your annuities in one provider basket.

“Annuity holders should look at the policy limits in their state,” Hirsch says. “Diversifying my client’s annuities across multiple insurers kept them within the state’s guarantee limits and prevented them from losing money. If an insurer fails, this plan gives you more safety.”

Assessing Insurer Stability With Expert Guidance

Annuity consumers, especially retirees living on a fixed income, should regularly assess the financial stability of the insurance companies managing their annuities. A trusted money manager can be a big help during that review process.

“Advisors should help clients understand their rights and options, including the protections offered by state guaranty associations,” says Lisamarie Monaco, co-owner of InsuranceForBurial.com in Jacksonville, FL. “In the event of insurer instability, advisors can assist in transferring policies or finding alternative income sources to minimize disruption.”

Safeguarding Your Annuities for Retirement

While insurer bankruptcies are rare, they do happen. Know your rights, work with a good financial advisor and choose quality, well-managed annuity providers who deliver high-end products.

“Take care of your annuities,” Monaco advises. “They’re crucial for those looking for financial security in retirement, as they help cover essential living expenses.”

Editor Norah Layne contributed to this article.