What happens if lifetime annuity issuer goes bankrupt?

[clifp]

Berkshire does not allow tax-deferred funds (e.g. qualified) to be used to purchase an SPIA. It can only be done with after tax contributions, per:

Frequently asked questions

Berkshire doesn't but other insurance companies do. AFAIK distribution would fully taxable in this case.

 

[meierlde]

Many of those in the 80's got too heavy into real estate and had liquidity problems. Liquidity problems can occur and still do. Some insurance company... perhaps Conseco (had problems with too many acquisitions and debt).

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It should be noted that Consecos annuities ended up paying off it was the creditors of the holding company that got the shaft. Just like in the case of AIG had it gone bankrupt it would have been the holding company not the underlying insurance companies in the US which are regulated by the states. One of the early attemps to help the holding company out was to have the insurance companies upstream some money to the holding company but that was not enough.

 

[meierlde]

Interesting speculation, but totally wrong - but please don't let facts get in the way of your view of the world.

A.I.G. Payments to Counterparties

Again one has to understand the corporate legal structure, the holding company made the payments, not the underlying insurance subsidiaries. Legally the books do not consolidate for insurance purposes.

 

[pb4uski]

Your example only applies if the funds that you used to purchase the annuity came from a non-qualified source. But as Rescueme stated if the funds came from a qualified plan (IRA/401K) then all distributions are fully taxable.

Yes, I agree. I wasn't specific.

 

[pb4uski]

Again one has to understand the corporate legal structure, the holding company made the payments, not the underlying insurance subsidiaries. Legally the books do not consolidate for insurance purposes.

I agree, many people don't understand that insurance strictly follows the legal entity structure nor do they understand the limitations on the distribution of cash from an insurer to its parent.

But my post was in response to clifp's speculation that insurance companies were a huge beneficiary of AIG FP's payments to counterparties under their CDSs and the data indicated that was not the case.

 

[brett]

In the US, does FDIC or some other organization provide any sort of guarantee against failure?

In Canada, my understanding is that we have an industry sponsored fund that guarantees up to $100K per firm. So the trick is that if you are buying more than a $100K policy, buy multiple policies from a few good companies. We did in fact have a large insurer go out of business a number of years ago-Confederation Life. The annuity policy holders did not skip a beat-the only change was the institution who paid them every month.

 

[pb4uski]

In the US the FDIC only applies to bank accounts, not insurance contracts.

The state guaranty funds you see referred to in this thread is similar to the industry sponsored fund that you refer to and the trick in the US would be to not have more than the guaranty amount with any single insurance company.

 

[meierlde]

In the US, does FDIC or some other organization provide any sort of guarantee against failure?

In Canada, my understanding is that we have an industry sponsored fund that guarantees up to $100K per firm. So the trick is that if you are buying more than a $100K policy, buy multiple policies from a few good companies. We did in fact have a large insurer go out of business a number of years ago-Confederation Life. The annuity policy holders did not skip a beat-the only change was the institution who paid them every month.

States have funds that guarantee annuities and life policies to some amount varying from 100k to 300k depending on the state. Recall that insurance is a state regulated product, and until Dodd Frank the feds had nothing to do with insurance, and even now just monitor the market.