Annuities provide investors with a range of benefits that include tax-deferred savings, minimum growth guarantees and an eventual income source. Due to the contract guarantees, many investors view annuities as a safe investment option. Annuities are not risk free and can drop in value, but certain safeguards exist that protect at least a portion of your investment.
Fixed annuities are deferred annuity contracts that provide you with guaranteed returns. Although fixed annuities offer principal protections, you could lose some of your investment if the insurance firm actually goes bankrupt. Variable annuities are deferred annuities in which your premiums are invested in mutual funds for a number of years. In a market downturn, a variable annuity may drop in value. You can buy insurance protections or riders on your contract that protect a portion of your investment if the contract drops in value. As with fixed annuities, you run the risk that your insurance firm may go bankrupt in which case your entire investment is at risk.
State Guaranty Funds
Insurance firms are regulated at the state level. You can only buy annuities from insurance companies licensed to operate in your state. Regulators have the power to reorganize failing firms so that investor's assets, including annuity premiums, are safeguarded. In some instances, regulators cannot find a way to save a firm from insolvency. When a firm fails, annuitants and insurance policy holders can file claims with the state insurance guaranty fund. Licensed insurance companies pay premiums into the guarantee fund and these premiums are used to cover investor's losses in the event that a firm goes bankrupt.
State guaranty coverage limits vary between states and protection is based on a per issuer, per contract holder basis. In Ohio and Texas, for example, your annuities are protected up to $250,000 per contract holder. If your contract's value exceeds the coverage limit then you stand to lose a portion of your investment. In some states, guaranty funds offer different levels of protection based on the status of your annuity contract. In Georgia, your funds are insured up to $250,000 during the accrual stage when your premiums are invested. The insurance protection rises to $300,000 per contract owner once you enter the payout stage and begin making withdrawals from the account.
Many brokerage firms belong to the Securities Investor Protection Corporation, a privately held company that insures investment accounts. If an investment firm becomes insolvent, the SIPC covers your losses up to $250,000 per account holder. The SIPC does not protect you from losses caused by securities losing value, but it does protect you against financial losses caused when a brokerage firm becomes insolvent. Variable annuities are among the securities the SIPC insures. However, the SIPC does not insure fixed annuity contracts and certain other types of insurance policies.
Video of the Day
- Thomas Northcut/Photodisc/Getty Images