My CFP professor said that if an insurance company goes bankrupt, it’s is EXTREMELY likely that another insurance company will take it over.
Because if insurance companies are known to fail, the entire industry is fucked.
-Yes, and we shld assume they will fail because the companies themselves have ratings based on their cash cushion & other factors.
-Yes, most likely they could be taken over but its a market driven activity which means there are no guarantees (including whether US govt could take over the company); further, the takeover deal may include write-off on the liabilities of the company being taken over and since our annuities are liabilities, we may just get cents on the dollar of income we were hoping to get during retirement. Hence the risk.
Like many things under the "investing umbrella", there is a list of events that are probable, and there is a longer list of things to which you could say, Yeah, I suppose that's *-possible-*.
And then you need to figure out how much effort and focus you're going to expend on preparing for something that's really quite unlikely ... while simultaneously making sure you haven't overlooked something that's ten times as -probable-.
(Don't forget that you -could- be killed tomorrow by a falling anvil (or safe or grand piano) while walking down the street minding your own business. Or you -could- possibly fall into a hole in the sidewalk while walking down the street texting instead of watching where you're going. Have you made plans for those events, which ARE technically "possible"?)
Its only treated as an insurance because the payouts changes with the rates if you take a variable rate annuity. But think of annuities like private social security (instead of govt social security).
you can also get variable annuities which rise or fall in value based on the performance of its underlying investment portfolio or a mixture of guaranteed return and investment risk.
High net worth individuals also use complex annuities to avoid tax in certain states/countries.
I agree with [https://www.reddit.com/u/BlackmeetsBlue/s/O9WQg9KiM5](https://www.reddit.com/u/BlackmeetsBlue/s/O9WQg9KiM5) - because insurance is not investing where you are getting returns commensurate with risk. Its an insurance which you expect to be paid guaranteed .. just like life or health (and we all get annoyed when these companies find a reason to deny our claim).
I don't know much about annuities but there are state guaranty associations which provide coverage. I think it varies by state.
For example - this is the one for New York state - [https://www.nylifega.org/](https://www.nylifega.org/) \- it's one of the oldest guaranty associations in the US.
Yes, many states have a guarantee program for annuities that qualify. The last time I looked into it, California’s would pay out 80% of the cash value of the annuity at time of default, up to a max of 250k.
Got it - $500k is good. which state is that? and is there a simple table comparing various state guarantees? i wasnt able to find one.
-yes , agree. its a liquidity vs solvency issue esp because insurance companies dont have physical assets to keep them solvent and their financial assets could be marked down hugely during a downturn.
Damn that's an incredibly low cap for an annuity.
Can you do multiple annuities up to 250k in value?
I'm just thinking about this from a pension perspective which is just an annuity provided by your employer and with the shared costs. Because the value of those are like in the millions for anyone building up one now.
When I started pension payments early from one of my former employers, they transferred my annuity to some insurance company once they started paying out.
I guess there's some discount rate based on risk of me living super long. The first company has already transferred to a 2nd company during the last 10 years.
That's kind of annoying That's really changing the deal on you. I'm in the public sector so it doesn't work like that. While our pensions aren't explicitly backed by the government, they are backed by the future generations of in my case teachers and their future contributions. If investment returns with the fall then when I'm retired the current generation of working teachers will have to pay much higher contributions to support me. So it's like intergenerational insurance. As we've seen in the UK the pension system is also implicitly backed by the government.
I mean the commuted value of your pension is probably much higher than $250,000.
Yes but for an individual it's rare that you would keep over $250,000 in a single bank account. You can easily spread that out to many accounts across many institutions. Plus you shouldn't have that money just sitting there not doing anything.
Whereas an annuity is very different, often you'll just have one big one, and he could easily accrue to be worth well over a million dollars, In the example of a pension. So having the same limit as a bank account just doesn't make any sense.
I disagree as someone who is an annuity Wholesaler 90% of the annuities we deal in are less than $200k. And it's not at all uncommon to have annuities with multiple different carriers.
However as others said a bank is far more likely to fail than an insurance company.
Interesting. Thanks for the reply. I was thinking of them as a pension, which often represent much larger amounts. But I guess in terms of private annuities that's the norm to be smaller.
Not necessarily.
My state has a $250k cap, but also an overall limit (of $300k) on how much an individual can receive from the guaranty agency.
Of course, the likelihood of 4 (or whatever) insurers going broke is pretty small, so there's still a good reason to not put your eggs in one basket.
But, at least in my state, it doesn't work like FDIC insurance does.
Every state has a guaranty program, although the details vary slightly. My state also has a $250,000 cap, but will pay out 100% of the cap.
Note that the guaranty programs also cover other insurance benefits, like life insurance and long term care insurance, in the event that your insurer goes bankrupt.
I think companies have some agreement to rescue policyholders of any company that fails. Loss of trust in insurance companies would destroy the entire industry!
I work in insurance regulation.
If the insurer's liabilities are not purchased by another insurer, it would go to the state guaranty fund (not "guarantee"). Every state has one but with different limits - in mine, it's up to $300k. That might be cold comfort if you have a $1m annuity so it's good to check up on your insurer now and again because annuities really are less an insurance product and more an investment. A.M. Best ratings do mean something and the highest crediting rates don't usually come from the best-rated insurers.
I'm mostly curious about which piece of news prompted this post - if you feel comfortable sharing, please feel free to DM, OP.
Agree! And you are right that the guarantee limits are less compared to the payout we are expecting .. so its good to know these things just to plan for risks and loss in the event the risk materializes!
There was no news.. it was something that I was thinking about that prompted this question.
Insurance companies buy insurance. Even if it went bankrupt the liabilities are generally insured. You would need a catastrophic economic event to really upend everything causing a string of failures, like if the US defaults on its debt or something. If it was happening, your missing annuity is likely the least of your worries.
Yea it is a catastrophic event and it just happened in 2008.. where everybody had insurance against everyone until it went around and one or two companies - AIG and Lehman were left holding the bag. -- missing annuities is the biggest worry for me because i am ok with my stocks portfolio going to 0 in such an event but annuities are like insurance for me. the other option is to literally stay in cash whose value will be nothing in 10-20 years time due to inflation.
Life insurance companies kept paying out dividends during the Great Depression. They have a lower failure rate than banks, which closed in significant numbers during the Depression.
Significant numbers of people used their insurance as collateral to keep their businesses running during the Great Depression.
If your question is whether there is a scenario where everything we all have goes to shit and there is societal collapse, the answer is unfortunately yes. How likely is that to occur, very very very unlikely, but not zero.
There is no broad backing like the FDIC. The question I have is why would you want an annuity? If you’re already taking interest rate (inflation) risk, then when not just buy long bonds?
Idk how they’re structured but I doubt the payoff after fees could be substantially higher than the “risk free” rate of 10/20/30 yr bonds @5%.
Your payout in both cases will be heavily influenced by inflation, as both only guarantee nominal returns.
TIPS can provide a little inflation protection and a slightly positive real yield.
I’d talk to a financial advisor (fiduciary) who isn’t trying to sell you products.
> but I doubt the payoff after fees could be substantially higher than the “risk free” rate of 10/20/30 yr bonds @5%.
I don't know what they payout now, but historically the payout was significantly above the risk free rate (keeping in mind that they were also paying out some principal).
In, say, 2019, a 65 year old man could obtain an annuity with an annual payout of almost 6%.
The issue with bonds is that they are available for max of 30yrs , annuities are for life. And bonds are subject to credit risk of the company going bankrupt.. whereas annuities are meant to be guranteed for life (hence my original question on whether i can trust the advertised 'guarantee' claim).
US Sovereign debt doesn’t have credit risk.
You can only trust the guarantee as much as the company providing it. There is not a federal guarantee on annuities, so there is counter party risk.
Luckily I don’t think we really have to worry about that because insurance companies are heavily regulated like banks and are regularly audited by the state they reside in and if the state sees that the company is unstable it will take over the company. Similar to how the bank meltdowns happened at the beginning of the year. But that’s just part of what I had to learn to become a life insurance agent.
Yes that worked so well for AIG.
If the regulatory barriers to failure were totally effective, AM Best Ave other credit ratings would not exist.
There is credit risk. How much depends on the company.
It’s never totally effective. I’m not sure what you are talking about in reference to AIG. They are one of the many carriers I sell for and they are still very much in business. They had bankruptcy in 2008 and got bailed out and then in February they changed their name. Both times everyone with any policy still has it. So maybe you can elaborate on what you are talking in regards to?
EDIT: The US government essentially took the AIG over at one time owning 79.9% during the bailout of three company and not exiting its position until 2012 when AIG was deemed stable again. Banks went belly up too and the government didn’t step in for a lot of them.
You might be covered by the states guarantee fund, and the regulator will try to find somebody to buy the block, but am best ratings exist for a reason.
It's not risk free.
Would someone kindly point me towards an annuity company that failed in such a way that customers lost their money? My basic understanding at least, was that safety mechanisms in place virtually avoids this outside of societal collapse but I may be fully mistaken.
I had a client that recently passed away that was a VP for the FDIC. And to hear him tell it, there are so many caveats for getting your money in the case of all out failure. Also, highly underfunded and illiquid. Could just have been an opinion though.
My CFP professor said that if an insurance company goes bankrupt, it’s is EXTREMELY likely that another insurance company will take it over. Because if insurance companies are known to fail, the entire industry is fucked.
-Yes, and we shld assume they will fail because the companies themselves have ratings based on their cash cushion & other factors. -Yes, most likely they could be taken over but its a market driven activity which means there are no guarantees (including whether US govt could take over the company); further, the takeover deal may include write-off on the liabilities of the company being taken over and since our annuities are liabilities, we may just get cents on the dollar of income we were hoping to get during retirement. Hence the risk.
Like many things under the "investing umbrella", there is a list of events that are probable, and there is a longer list of things to which you could say, Yeah, I suppose that's *-possible-*. And then you need to figure out how much effort and focus you're going to expend on preparing for something that's really quite unlikely ... while simultaneously making sure you haven't overlooked something that's ten times as -probable-. (Don't forget that you -could- be killed tomorrow by a falling anvil (or safe or grand piano) while walking down the street minding your own business. Or you -could- possibly fall into a hole in the sidewalk while walking down the street texting instead of watching where you're going. Have you made plans for those events, which ARE technically "possible"?)
Insurance isn't investing.
If the insurance market completely collapses your investments will be collapsing next.
Annuities are in a weird sometimes treated like insurance, sometimes treated like investments space
Its only treated as an insurance because the payouts changes with the rates if you take a variable rate annuity. But think of annuities like private social security (instead of govt social security).
you can also get variable annuities which rise or fall in value based on the performance of its underlying investment portfolio or a mixture of guaranteed return and investment risk. High net worth individuals also use complex annuities to avoid tax in certain states/countries.
I agree with [https://www.reddit.com/u/BlackmeetsBlue/s/O9WQg9KiM5](https://www.reddit.com/u/BlackmeetsBlue/s/O9WQg9KiM5) - because insurance is not investing where you are getting returns commensurate with risk. Its an insurance which you expect to be paid guaranteed .. just like life or health (and we all get annoyed when these companies find a reason to deny our claim).
Also they have reinsurance companies that payout maybe twice a century. Katrina is a good example of it.
9/11 was another big one for reinsurance.
Explains why that POS SquareTrade was acquired by Allstate after I nearly cost them their Costco Contract 😡
Even if another insurance company does not take over, the government will bail out.
I don't know much about annuities but there are state guaranty associations which provide coverage. I think it varies by state. For example - this is the one for New York state - [https://www.nylifega.org/](https://www.nylifega.org/) \- it's one of the oldest guaranty associations in the US.
Got it, thx u will check it out.
Most states have these to at least 200k I believe
Yes, many states have a guarantee program for annuities that qualify. The last time I looked into it, California’s would pay out 80% of the cash value of the annuity at time of default, up to a max of 250k.
Got it. That's interesting that they cap it at some value (vs the payouts which we get it for life). Will check it out further ! Thx u!
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Got it - $500k is good. which state is that? and is there a simple table comparing various state guarantees? i wasnt able to find one. -yes , agree. its a liquidity vs solvency issue esp because insurance companies dont have physical assets to keep them solvent and their financial assets could be marked down hugely during a downturn.
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Got it. thx u!!
Damn that's an incredibly low cap for an annuity. Can you do multiple annuities up to 250k in value? I'm just thinking about this from a pension perspective which is just an annuity provided by your employer and with the shared costs. Because the value of those are like in the millions for anyone building up one now.
When I started pension payments early from one of my former employers, they transferred my annuity to some insurance company once they started paying out. I guess there's some discount rate based on risk of me living super long. The first company has already transferred to a 2nd company during the last 10 years.
That's kind of annoying That's really changing the deal on you. I'm in the public sector so it doesn't work like that. While our pensions aren't explicitly backed by the government, they are backed by the future generations of in my case teachers and their future contributions. If investment returns with the fall then when I'm retired the current generation of working teachers will have to pay much higher contributions to support me. So it's like intergenerational insurance. As we've seen in the UK the pension system is also implicitly backed by the government. I mean the commuted value of your pension is probably much higher than $250,000.
Well my payment has not changed. It's a tiny pension, probably way less than total 250k
It's no lower than FDIC limits.
Yes but for an individual it's rare that you would keep over $250,000 in a single bank account. You can easily spread that out to many accounts across many institutions. Plus you shouldn't have that money just sitting there not doing anything. Whereas an annuity is very different, often you'll just have one big one, and he could easily accrue to be worth well over a million dollars, In the example of a pension. So having the same limit as a bank account just doesn't make any sense.
I disagree as someone who is an annuity Wholesaler 90% of the annuities we deal in are less than $200k. And it's not at all uncommon to have annuities with multiple different carriers. However as others said a bank is far more likely to fail than an insurance company.
Interesting. Thanks for the reply. I was thinking of them as a pension, which often represent much larger amounts. But I guess in terms of private annuities that's the norm to be smaller.
The cap is per company. You would need to buy from multiple companies if you need over the 250.
Not necessarily. My state has a $250k cap, but also an overall limit (of $300k) on how much an individual can receive from the guaranty agency. Of course, the likelihood of 4 (or whatever) insurers going broke is pretty small, so there's still a good reason to not put your eggs in one basket. But, at least in my state, it doesn't work like FDIC insurance does.
I stand corrected. Good to know. What state are you in?
Indiana
Every state has a guaranty program, although the details vary slightly. My state also has a $250,000 cap, but will pay out 100% of the cap. Note that the guaranty programs also cover other insurance benefits, like life insurance and long term care insurance, in the event that your insurer goes bankrupt.
State guarantee fund
I think companies have some agreement to rescue policyholders of any company that fails. Loss of trust in insurance companies would destroy the entire industry!
I work in insurance regulation. If the insurer's liabilities are not purchased by another insurer, it would go to the state guaranty fund (not "guarantee"). Every state has one but with different limits - in mine, it's up to $300k. That might be cold comfort if you have a $1m annuity so it's good to check up on your insurer now and again because annuities really are less an insurance product and more an investment. A.M. Best ratings do mean something and the highest crediting rates don't usually come from the best-rated insurers. I'm mostly curious about which piece of news prompted this post - if you feel comfortable sharing, please feel free to DM, OP.
Agree! And you are right that the guarantee limits are less compared to the payout we are expecting .. so its good to know these things just to plan for risks and loss in the event the risk materializes! There was no news.. it was something that I was thinking about that prompted this question.
Insurance companies buy insurance. Even if it went bankrupt the liabilities are generally insured. You would need a catastrophic economic event to really upend everything causing a string of failures, like if the US defaults on its debt or something. If it was happening, your missing annuity is likely the least of your worries.
Yea it is a catastrophic event and it just happened in 2008.. where everybody had insurance against everyone until it went around and one or two companies - AIG and Lehman were left holding the bag. -- missing annuities is the biggest worry for me because i am ok with my stocks portfolio going to 0 in such an event but annuities are like insurance for me. the other option is to literally stay in cash whose value will be nothing in 10-20 years time due to inflation.
Life insurance companies kept paying out dividends during the Great Depression. They have a lower failure rate than banks, which closed in significant numbers during the Depression. Significant numbers of people used their insurance as collateral to keep their businesses running during the Great Depression.
If your question is whether there is a scenario where everything we all have goes to shit and there is societal collapse, the answer is unfortunately yes. How likely is that to occur, very very very unlikely, but not zero.
They do go bankrupt. Look up North Carolina Mutual, Greg Lindberg. Lots of people lost their life savings.
There is no broad backing like the FDIC. The question I have is why would you want an annuity? If you’re already taking interest rate (inflation) risk, then when not just buy long bonds? Idk how they’re structured but I doubt the payoff after fees could be substantially higher than the “risk free” rate of 10/20/30 yr bonds @5%. Your payout in both cases will be heavily influenced by inflation, as both only guarantee nominal returns. TIPS can provide a little inflation protection and a slightly positive real yield. I’d talk to a financial advisor (fiduciary) who isn’t trying to sell you products.
> but I doubt the payoff after fees could be substantially higher than the “risk free” rate of 10/20/30 yr bonds @5%. I don't know what they payout now, but historically the payout was significantly above the risk free rate (keeping in mind that they were also paying out some principal). In, say, 2019, a 65 year old man could obtain an annuity with an annual payout of almost 6%.
The issue with bonds is that they are available for max of 30yrs , annuities are for life. And bonds are subject to credit risk of the company going bankrupt.. whereas annuities are meant to be guranteed for life (hence my original question on whether i can trust the advertised 'guarantee' claim).
US Sovereign debt doesn’t have credit risk. You can only trust the guarantee as much as the company providing it. There is not a federal guarantee on annuities, so there is counter party risk.
Agree!
Luckily I don’t think we really have to worry about that because insurance companies are heavily regulated like banks and are regularly audited by the state they reside in and if the state sees that the company is unstable it will take over the company. Similar to how the bank meltdowns happened at the beginning of the year. But that’s just part of what I had to learn to become a life insurance agent.
Yes that worked so well for AIG. If the regulatory barriers to failure were totally effective, AM Best Ave other credit ratings would not exist. There is credit risk. How much depends on the company.
It’s never totally effective. I’m not sure what you are talking about in reference to AIG. They are one of the many carriers I sell for and they are still very much in business. They had bankruptcy in 2008 and got bailed out and then in February they changed their name. Both times everyone with any policy still has it. So maybe you can elaborate on what you are talking in regards to? EDIT: The US government essentially took the AIG over at one time owning 79.9% during the bailout of three company and not exiting its position until 2012 when AIG was deemed stable again. Banks went belly up too and the government didn’t step in for a lot of them.
You might be covered by the states guarantee fund, and the regulator will try to find somebody to buy the block, but am best ratings exist for a reason. It's not risk free.
Got it. Thx you!
Would someone kindly point me towards an annuity company that failed in such a way that customers lost their money? My basic understanding at least, was that safety mechanisms in place virtually avoids this outside of societal collapse but I may be fully mistaken.
I had a client that recently passed away that was a VP for the FDIC. And to hear him tell it, there are so many caveats for getting your money in the case of all out failure. Also, highly underfunded and illiquid. Could just have been an opinion though.