What happens if lifetime annuity issuer goes bankrupt?

[Richard4444]

The state funds are not backed by the states in any way - no "full faith and credit" stuff here. The funds are a mutual guarantee of companies selling that class of product within the state. Theoretically, a company can refuse to pay for another company's failure but they would lose the right to sell that product in that state.

Thanks for that clarification !

 

[Midpack]

Can you make more "on the outside"? Sure. However, you can also lose due to investment risk.

This seems to be the $64,000 question in the end. While you can avoid a potential portfolio loss by buying an annuity, you also forego years if not decades of gains if returns are average or above. You can't really change your mind once you buy an annuity, but if you hold your money on the "outside" you can buy an annuity next week, next month, next year, next decade or later. To me waiting is having your cake and eating it too. YMMV

If you're bearish on the future, your portfolio is already close to your annuitization hurdle, you aren't comfortable managing a portfolio and/or you just can't sleep with uncertain floor income - you're a good candidate for an annuity. If you expect future real returns to be no worse than the past, your porfolio is greater than your annuitization hurdle, and your risk tolerance allows you to sleep well for now - you might be well served to wait for higher interest rates/annuity yields and shorten the years of exposure to insurer default (admittedly a remote possibility if the past is any indication).

 

[rescueme]

Also remember that any insurance company operating in your respective state is prohibited to discuss/advertise anything related to this type of default coverage (strange as it may seem):

Advertising Prohibition - Google Search

 

[rescueme]

...you just can't sleep with uncertain floor income - you're a good candidate for an annuity.

That was certainly the driver in our case, with the plan to both retire at age 59, but deferring SS till DW's FRA age (66) and mine at 70 (primarily for her benefit, assuming I will pass first).

Sure, we could have just tapped our respective retirement portfolios, but "converting" 10% of the then current value to provide a base ER income made more sense, along with "trading up" to a superior COLA'ed "pension" in the form of SS by delaying it well into the future. BTW, we did exceed the state guarantee, but that's a form of "risk taken" in our total plan. Our continued SPIA monthly payments will just be "icing on the cake" after our other income streams (including two small pensions for DW start in a year) come on line.

Every situation/desire is different (that's why they make other ice cream flavors besides vanilla - even though it is the most popular) ...

 

[brewer12345]

<--- considering buying a SPIA or two, and I have always believed that the state guaranty fund would step in up to their limit. Are they backed by either general obligations of the state, or other insurance companies, or something secure? Although certainly not FDIC guaranteed, I had thought they were similarly backed by the state fund. Not so ??

Everything you ever wanted to know about [-]sex[/-] state guaranty funds, but were afraid to ask:

www.nohlga.com

 

[pb4uski]

I've known people that have had the "lifetime annuity" company go broke. In the one case I know the whole story for (Lutheran Brotherhood), they were eventually "made whole." This would have been limited by the state guarantee fund if they would have been over that limit. It took several years to get the past due money. Life's a bitch if you were planning to live on that cash.

The state funds are not backed by the states in any way - no "full faith and credit" stuff here. The funds are a mutual guarantee of companies selling that class of product within the state. Theoretically, a company can refuse to pay for another company's failure but they would lose the right to sell that product in that state.

Another thing to consider is that companies can sell your annuity to another company. You have no control over that. You might find yourself having bought a triple A annuity only to find a decade later that the new holder is single A. That's happened to my term life insurance twice. The new company always has a lower rating.

I think you are wrong. Neither Lutheran Brotherhood nor Aid Association for Lutherans went broke, or into receivership or anything like that. You're badmouthing a good company (inadvertently I hope).

It is very difficult for an annuity to be sold to another company (called a novation). While the rules vary from state to state, in many states positive policyholder consent is required or negative consent is accepted. In other states, the commissioner can approve the transfer. More typically, the economics and administration are transferred or "sold" to another carrier through reinsurance, BUT in most cases if the "buyer" is unable to perform on its obligations then the original issuing company is obligated to make up any difference (called the "primary" obligor).

IMO, carrier risk is not very significant - and certainly much less significant than credit risk of a corporate bond given the regulation of the industry, risk-based capital requirements, asset-liability matching and the impact of the rating agencies on carriers.

 

[rescueme]

IMO, carrier risk is not very significant - and certainly much less significant than credit risk of a corporate bond given the regulation of the industry, risk-based capital requirements, asset-liability matching and the impact of the rating agencies on carriers.

+1

 

[pb4uski]

Now I'm confused about this annuity thing. I hear many people and undertand that payouts will be better once interest rates rise. However if interest rates rise I probably won't need one as much. .....

That is why they call it longevity insurance. One way to look at it is that you are trading off what would be left of your investment if you die young for the assurance of not outspending your investment if you live to a ripe old age. There is no such thing as a free lunch.

.....The risk potential associated with the carrier adds to my inclination to avoid these until I absolutely need an income for basic needs.

see prior post.

 

[Chuckanut]

IMHO, the key to securing long term retirement funds is diversification. If an annuity can add diversification to a financial situation that is not well diversified, and the cost is reasonable, then it could be a good thing for some individiduals. If one has only two sources of income (say SS and personal savings) adding a third source could be a smart move. Of course, one must always run the numbers and do the due dilegence.

 

[rescueme]

...If one has only two sources of income (say SS and personal savings) adding a third source could be a smart move.

Heck, nobody ever called me smart ...

Thanks for the vote of confidence...

 

[braumeister]

Everything you ever wanted to know about [-]sex[/-] state guaranty funds, but were afraid to ask:

Bad link, Brewer.
This is what you meant:

nolhga.com :: Policyholder Information

 

[samclem]

If one has only two sources of income (say SS and personal savings) adding a third source could be a smart move. Of course, one must always run the numbers and do the due dilegence.

And part of the due diligence, of course, is looking at the source of the underlying funds. If the same factors (e.g. poor equity return over time) would undermine both one's personal portfolio and the financial stability of annuity issuers, then buying an annuity might not offer much true additional protection.

 

[2B]

Also remember that any insurance company operating in your respective state is prohibited to discuss/advertise anything related to this type of default coverage (strange as it may seem):

Advertising Prohibition - Google Search

From talking to people that have looked at annuities, I can assure you that numerous agents "casually" mention the "state guarantee" without disclosing the limitations. It's always verbal and an aside type comment.

 

[Chuckanut]

And part of the due diligence, of course, is looking at the source of the underlying funds. If the same factors (e.g. poor equity return over time) would undermine both one's personal portfolio and the financial stability of annuity issuers, then buying an annuity might not offer much true additional protection.

Absolutely! I cannot agree more.

Of course, one's own personal portfolio could be damaged by one's own poor choices or circumstances that do not affect the annuity issuer. That is why I like diversification. I carry no brief for annuities and probably would not buy one (other than annutizing SS by delaying my start date). But, I can see that they might be useful to others.

 

[pb4uski]

And part of the due diligence, of course, is looking at the source of the underlying funds. If the same factors (e.g. poor equity return over time) would undermine both one's personal portfolio and the financial stability of annuity issuers, then buying an annuity might not offer much true additional protection.

If you are comparing annuities to a bond portfolio you might have a bit of a point, but in reality the factors are probably very different. Poor equity returns would have a much bigger adverse impact on an individual than an insurer because typically an insurer's equity investments are not very significant (as a percentage of their entire investment portfolio).

The annuity issued by the insurance company is principally backed by a portfolio of bonds that are broadly matched with the annuity obligations (the asset-liability matching referred to in a prior post) and are further backstopped by the capital that the regulators and rating agencies require and the insurer's financial strength is continuously monitored by insurance regulators and the rating agencies.

Our personal portfolios are typically much more equity heavy because of the need to increase annual withdrawals for inflation which usually isn't part of a payout annuity.

 

[pb4uski]

From talking to people that have looked at annuities, I can assure you that numerous agents "casually" mention the "state guarantee" without disclosing the limitations. It's always verbal and an aside type comment.

And unfortunately, the mention of state guaranty associations is probably the least egregious of the misstatements that some agents make during the sales process. Caveat emptor!

 

[2B]

I think you are wrong. Neither Lutheran Brotherhood nor Aid Association for Lutherans went broke, or into receivership or anything like that. You're badmouthing a good company (inadvertently I hope).

I was hoping to paste a link on the failure into my response but I couldn't find the article. They are on a list of failed insurance companies. The failure was over 20 years ago now. I think two principals at Lutheran Brotherhood saw the inside of a federal prison or got very close. I can't remember all of the details.

I do know someone that had to deal with their failure. It wasn't very pretty and they were without their income stream for almost two years because of all the legal mess. Eventually, they were awarded an equivalent stream of income and back payments made. Because the person was about 10 years older than when they originally purchased the annuity, the "face amount" of the annuity was significantly lower but he was still getting the same monthly payments. That pissed the guy off royally and would not agree that the value put on the annuity didn't matter if he still got the same payment.

As for badmouthing a good company, my search turned up a nice collection of recent enforcement actions against them. Is this unusual? Unfortunately, these are all too common in the wonderful world of annuities -- especially variable annuities which I realize is not the specific topic here.

It is very difficult for an annuity to be sold to another company (called a novation). While the rules vary from state to state, in many states positive policyholder consent is required or negative consent is accepted. In other states, the commissioner can approve the transfer. More typically, the economics and administration are transferred or "sold" to another carrier through reinsurance, BUT in most cases if the "buyer" is unable to perform on its obligations then the original issuing company is obligated to make up any difference (called the "primary" obligor).

IMO, carrier risk is not very significant - and certainly much less significant than credit risk of a corporate bond given the regulation of the industry, risk-based capital requirements, asset-liability matching and the impact of the rating agencies on carriers.

I'll agree that carrier risk is not a major risk factor. I do not know of anyone or heard of anyone not getting all their money (eventually) if the value of their SPIA is under the state guarantee fund limit. The performance of the funds are not so good on other types of insurance products. The limitations of coverage are very, very specific to active insurance based payments. Nothing covers policies not collected on but still being paid on or all the fancy variable annuity riders.

As for changes, my FIL was getting a small SPIA and suddenly the checks started coming from someone else. We were managing his finances and never got contacted other than the statements had a different corporate logo on them. I can't say whether it was "administrative" or a complete legal transfer. We didn't complain because my FIL was in hospice so there wasn't enough time to screw his cash flow up unless they failed really fast. They didn't.

 

[pb4uski]

I was hoping to paste a link on the failure into my response but I couldn't find the article. They are on a list of failed insurance companies. The failure was over 20 years ago now. I think two principals at Lutheran Brotherhood saw the inside of a federal prison or got very close. I can't remember all of the details......

So you are sure that Lutheran Brotherhood failed but you can't find anything to substantiate it. OTOH, Executive Life failed over 20 years ago and the web is replete with articles on that event. With all due respect 2B, I think you are mistaken. I also looked at the listings on the NOLHGA website and there is no mention of an insolvency for LB or AAL. It sounds to me like perhaps the event you are referring to might be some rogue agents or something, but much less severe than a receivership.

.....I do know someone that had to deal with their failure. It wasn't very pretty and they were without their income stream for almost two years because of all the legal mess. Eventually, they were awarded an equivalent stream of income and back payments made. Because the person was about 10 years older than when they originally purchased the annuity, the "face amount" of the annuity was significantly lower but he was still getting the same monthly payments. That pissed the guy off royally and would not agree that the value put on the annuity didn't matter if he still got the same payment.....

Once you buy a SPIA or annuitize a deferred annuity, there is no "value" - your only right is to monthly payments. There is no face amount. There is a reserve and that would increase for interest and decrease as monthly payments are made and it would be lower 10 years into the contract but it typically isn;t disclosed to the policyholder. If your friend was still getting the same monthly payments, he was getting what he was entitled to so the "problem" was in his head.

As for badmouthing a good company, my search turned up a nice collection of recent enforcement actions against them. Is this unusual? Unfortunately, these are all too common in the wonderful world of annuities -- especially variable annuities which I realize is not the specific topic here.

Care to post them? I also did a search and could not find much. Virtually all insurers will have some and based on my experience Thrivent should be better (less complaints) than most.

....As for changes, my FIL was getting a small SPIA and suddenly the checks started coming from someone else. We were managing his finances and never got contacted other than the statements had a different corporate logo on them. I can't say whether it was "administrative" or a complete legal transfer. We didn't complain because my FIL was in hospice so there wasn't enough time to screw his cash flow up unless they failed really fast. They didn't.

So what is the big problem you are referring to in post #23? I don't see why you think getting a check from someone else is a problem - you are still getting a check. In the event of a transfer or name change or similar event typically there would be a letter or some notification - perhaps you missed it.

 

[samclem]

The annuity issued by the insurance company is principally backed by a portfolio of bonds that are broadly matched with the annuity obligations (the asset-liability matching referred to in a prior post) and are further backstopped by the capital that the regulators and rating agencies require and the insurer's financial strength is continuously monitored by insurance regulators and the rating agencies.

Well, here's how confident the insurance companies were in all their investments and backup plans the last time we had a little burble. In part:

Insurers, including The Hartford, Prudential and MetLife, have pushed the Bush administration to include them in the [bailout] plan. Many firms have taken losses from mortgage-related securities and other investments and are struggling to replenish their coffers.

And I didn't even mention AIG, the country's largest insurer that reportedly ran into some difficulties.

Our personal portfolios are typically much more equity heavy because of the need to increase annual withdrawals for inflation which usually isn't part of a payout annuity.

And that's another, separate, shortfall of most annuities.

 

[pb4uski]

.

Well, here's how confident the insurance companies were in all their investments and backup plans the last time we had a little burble. ....

The fact is that many significant banks failed during the recession but there were NO significant insurance company failures. There were some (Lincoln, Hartford, Genworth) that had significant difficulties, but none failed. A few did take bailout funds and are in the process of paying them back.

And I didn't even mention AIG, the country's largest insurer that reportedly ran into some difficulties.

AIG's problems were related to unregulated derivatives up at the holding company but their insurance operations were sound and it is the proceeds from the sale of many of those insurance operations that is providing the funds to pay back the bailout of AIG's unregulated operations.

And that's another, separate, shortfall of most annuities.

I agree, but the reason that you don't see a lot of cola'd payout annuities in the marketplace is because insurers understand the risks associated with them and are unwilling to take the risk.

 

[MooreBonds]

Not trying to hijack this thread...but when I went to the link posted for the state annuity guaranty associations (http://www.nolhga.com/policyholderinfo/main.cfm) , I saw that the Missouri association also guarantees health insurers. (probably varies from state to state).

I guess I never really thought much about a health insurer needing/having this protection. The eye-opening thing is that the limit they reference was $100,000....so, the moral of the story is, if you happen to be anticipating a major health care situation/expenditure, and your health insurer has any hint of running into financial trouble, best to keep on your toes and verify those EOBs and push through all of those bills to be processed ASAP to avoid being stuck with bills exceeding your state insurance guaranty association's cap (if it covers health insurers).

 

[2B]

Not trying to hijack this thread...but when I went to the link posted for the state annuity guaranty associations (nolhga.com :: Policyholder Information) , I saw that the Missouri association also guarantees health insurers. (probably varies from state to state).

I guess I never really thought much about a health insurer needing/having this protection. The eye-opening thing is that the limit they reference was $100,000....so, the moral of the story is, if you happen to be anticipating a major health care situation/expenditure, and your health insurer has any hint of running into financial trouble, best to keep on your toes and verify those EOBs and push through all of those bills to be processed ASAP to avoid being stuck with bills exceeding your state insurance guaranty association's cap (if it covers health insurers).

I'm not totally sure how the medical guarantee works in Mo. but the guarantee association only covers the legally allowed disbursements. There is no guarantee of continued coverage. If a medical insurance firm fails, other companies are not required to insure you for the same rate. If you have incurred bills those are included. I'm sure it could get messy if you were in the middle of an expensive treatment.

This is also an issue for life insurance and LTC insurance. I've asked about these but haven't received a solid answer.

 

[ReadySkiDaddy]

Now I'm confused about this annuity thing. I hear many people and undertand that payouts will be better once interest rates rise. However if interest rates rise I probably won't need one as much. The risk potential associated with the carrier adds to my inclination to avoid these until I absolutely need an income for basic needs.

My advice to you is to learn all of the many negatives about annuities because NO BROKER will ever discuss all of the negatives with you. They just want to earn their giant sales commission, which is a whole lot more with annuities than with other "retail" investments like mutual funds.
Pros and cons of annuities: An annuity is a terrible investment
Don't be suckered into purchasing variable annuity | The San Diego Union-Tribune

 

[brewer12345]

Everything you ever wanted to know about [-]sex[/-] state guaranty funds, but were afraid to ask:

Bad link, Brewer.
This is what you meant:

nolhga.com :: Policyholder Information

Good catch.

 

[Richard4444]

My advice to you is to learn all of the many negatives about annuities because NO BROKER will ever discuss all of the negatives with you. They just want to earn their giant sales commission, which is a whole lot more with annuities than with other "retail" investments like mutual funds.
Pros and cons of annuities: An annuity is a terrible investment
Don't be suckered into purchasing variable annuity | The San Diego Union-Tribune

I read the first article: Pros and cons ........ It seems that that is specific to variable annuities and I believe that this thread is mostly referring to SPIAs.