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Annuity Payments Are "Guaranteed" ...
Old 12-06-2007, 07:41 PM   #1
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Annuity Payments Are "Guaranteed" ...

... "subject to the claims-paying ability of the sponsoring company".

What does that actually mean? Could such a company lower payouts if, for instance, their history and projections showed an unsustainable level of payouts (a la insurance companies raising their rates across the board)?

Or does the company have to maintain the payouts until they go bankrupt?

Or something else?

:confused:
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Old 12-06-2007, 07:51 PM   #2
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Quote:
Originally Posted by TickTock View Post
... "subject to the claims-paying ability of the sponsoring company".

What does that actually mean? Could such a company lower payouts if, for instance, their history and projections showed an unsustainable level of payouts (a la insurance companies raising their rates across the board)?

Or does the company have to maintain the payouts until they go bankrupt?

Or something else?

:confused:

Yikes! I have never looked to insurance products (or anything resembling an annuity) as a supplement to my retirement. Is that a standard/typical disclaimer? Sounds to me like a blanket disclaimer.
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Old 12-06-2007, 08:23 PM   #3
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Originally Posted by TickTock View Post
... "subject to the claims-paying ability of the sponsoring company".

What does that actually mean? Could such a company lower payouts if, for instance, their history and projections showed an unsustainable level of payouts (a la insurance companies raising their rates across the board)?

Or does the company have to maintain the payouts until they go bankrupt?

Or something else?

:confused:
Some annuities have "guaranteed" payments, some have "non-guaranteed" payments.

Currently, I think most life annuities (aka payout annuities, income annuities, immediate annuities) are "guaranteed". That means not paying you is about the same as defaulting on a bond. The contract and advertising material should be very explicit regarding guaranteed or non-guaranteed payments. If they aren't guaranteed, there should be some discussion about how they can be changed (which could be "solely at the company's discretion").

When most life insurance companies were mutuals, annuity payments could include a "dividend". There aren't a lot of mutuals left, and even the remaining mutuals are likely to have "guaranteed" payments. (My former employer is still a mutual. They got away from dividend-paying immediate annuities about 10 years ago.)
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Old 12-06-2007, 09:19 PM   #4
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The contract and advertising material should be very explicit regarding guaranteed or non-guaranteed payments.
Heh. In the contract, maybe (in 3-point Dingbats format!). In the advertising material, not so much.
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Old 12-06-2007, 09:26 PM   #5
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From Vanguard's site:

Vanguard Lifetime Income Program -- Overview

"The fixed annuity guarantee is based on the claims-paying ability of AIG Life Insurance Company and American International Life Assurance Company of New York (in New York State only), which are the insurance companies that issue the annuity."
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Old 12-06-2007, 09:36 PM   #6
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I'm just curious. Why would somebody with the following sig be even remotely interested in an annuity?

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TickTock Rule of Finance: Heavily discount promises of money/benefits to be paid to you in the future.
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Old 12-06-2007, 09:47 PM   #7
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No problem twaddle; I'm not interested in them for myself, but I do like to understand things. And I don't understand what that term means. If I did, then I'd know better how to discount annuity values in my own analysis.
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Old 12-06-2007, 09:52 PM   #8
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Currently, I think most life annuities (aka payout annuities, income annuities, immediate annuities) are "guaranteed". That means not paying you is about the same as defaulting on a bond.
Given that, how bad would an insurance company's finances and projections have to be before they would lower the guaranteed payment? (I'm guessing similarly to rate increases on other insurance products?)
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Old 12-06-2007, 10:26 PM   #9
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Okay, my search-fu finally turned up solid information!

nolhga.com :: welcome There are state Guarantee Associations that belong to the National Guarantee Association.

If an insurer goes insolvent, it gets turned over to the GA. They guarantee annuities (and other insurance products), but only to certain limits. Limits are higher in certain states, but usually the max limit is:

"$100,000 in withdrawal and cash values for annuities "

So as far as I can tell, payments continue at the guaranteed level unless the insurer goes insolvent, at which time $100,000 is guaranteed by the GA. Also:

"The value in excess of guaranty association benefit limits is eligible for submission as a creditor claim against the estate of the failed insurance company, and the contract holder may receive distributions as the company’s assets are liquidated by the receiver. "

That's the best my internet search skills can uncover. If anyone knows more, let me know.
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Old 12-07-2007, 07:50 AM   #10
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Originally Posted by TickTock View Post
Okay, my search-fu finally turned up solid information!

nolhga.com :: welcome There are state Guarantee Associations that belong to the National Guarantee Association.

If an insurer goes insolvent, it gets turned over to the GA. They guarantee annuities (and other insurance products), but only to certain limits. Limits are higher in certain states, but usually the max limit is:

"$100,000 in withdrawal and cash values for annuities "

So as far as I can tell, payments continue at the guaranteed level unless the insurer goes insolvent, at which time $100,000 is guaranteed by the GA. Also:

"The value in excess of guaranty association benefit limits is eligible for submission as a creditor claim against the estate of the failed insurance company, and the contract holder may receive distributions as the company’s assets are liquidated by the receiver. "

That's the best my internet search skills can uncover. If anyone knows more, let me know.
A good reason to spread out one's annuity over couple of different company's.
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Old 12-07-2007, 09:29 AM   #11
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Given that, how bad would an insurance company's finances and projections have to be before they would lower the guaranteed payment? (I'm guessing similarly to rate increases on other insurance products?)
Not sure what you mean here. If the payment is "guaranteed", then the insurer doesn't have the legal right to lower the payment. The only thing management could do if their projections show disaster is to ask the state to take over management of the company.

States also require routine financial filings from insurance companies. It they look "bad enough", the state can do a mandatory take-over. The intent of regulation is that "bad enough" occurs before the company gets so weak that it can't cover its guarantees.

The information you quoted on state guarantee associations is correct. However, note that guarantee associations aren't backed by the "full faith and credit" of the state. They get the money for bailouts by assessing the healthy insurers in the state.
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Old 12-07-2007, 10:05 AM   #12
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Insurance products are guaranteed by the issuing company, with a back up by the (typically flimsy) state guaranty funds. So when you buy an insurance product, you want to look mostly to the financial strength of the insurer you are buying from. This is why I suggest buying from a company rated at least Aa3/AA-, and preferably a mutual company. Also, the bigger the better. And if this is a big chunk of your net worth, probably wiser to spread it out.

Insurers do not have the right to unilaterally reduce payments to policyholders unless they are insolvent/taken over by the regulator. This is a very rare occurrence for life companies. Even when it does happen, retail policyholders are typically very well secured, with recoveries typically at 100 cents on the dollar plus interest. Life companies in the US are extensively regulated and extremely hard to kill. When they do run into trouble, most get bought out by a competitor who then assumes the policyholder obligations. So I wouldn't worry a whole lot, but it is best to buy from a strong company. I used to do credit work on these companies for a living, so if you want an opinion, just ask.
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Old 12-07-2007, 10:15 AM   #13
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... "subject to the claims-paying ability of the sponsoring company".
:confused:
It is what it is.........

If they can't pay, the regulators will get involved quickly............
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