What Happens To An Annuity If Your Insurance Company Fails?

Annuities are often marketed as a safe and reliable source of income, especially in retirement. They come with the promise of steady payments — a sort of paycheck replacement designed to offer peace of mind to risk-averse retirees.

But what happens if the insurance company backing your annuity goes broke? While insurance insolvency is rare, it can happen.

Here’s everything you need to know if your annuity company goes broke.

It’s rare, but insurance companies can fail

Annuity companies operate under strict regulations. They’re required to hold substantial reserves to cover their obligations, including annuity payments. Despite these safeguards, life insurance companies can face insolvency.

Insolvency occurs when an insurance company can no longer afford to pay out claims and doesn’t have enough assets to cover its liabilities.

Insurance companies can face insolvency for different reasons, including economic downturns, poor investment strategies, fraud or mismanagement.

What happens to your annuity if the insurance company fails?

If the insurance company issuing your annuity goes belly up, your principal and future payments aren’t insured by the federal government, the way deposits of up to $250,000 are at FDIC-insured banks. Or the way the Securities Investor Protection Corp (SIPC) provides up to $500,000 to investors if their brokerage firm fails.

While there’s no federal safety net for annuities, state insurance guaranty associations offer some protection to policyholders. If an insurance company becomes insolvent, these associations can step in to cover some or all of your annuity benefits.

The state intervenes

Insurance is regulated at the state level, so federal laws like bankruptcy statutes typically don’t apply to insurance companies. Instead, when an insurer becomes insolvent, the state insurance department intervenes and assumes control of the company.

Liquidation is the last resort. It’s only used when rehabilitation or other corrective measures fail to stabilize the company’s finances. The process involves shutting down the business and selling its assets to pay off outstanding claims.

Policyholders will be notified of the liquidation and provided with instructions on how to file a claim against the company’s estate. Guaranty associations often take over from here.

State guaranty associations attempt to make policyholders whole

Guaranty associations are nonprofit organizations established by state law to protect policyholders from significant financial losses if their insurer becomes insolvent.

When an insurance company fails, these associations step in to cover eligible claims that the insurer would have otherwise paid.

All insurance companies are legally required to participate in these associations and contribute funds.

Not all claims are covered though, and there are limits on how much an association will pay per claim. Maximum coverage varies by state, with $250,000 being a common limit for annuities. The amount of protection you qualify for is based on the present value of your future annuity benefits, according to the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA).

What to do if your insurance company becomes insolvent

If you learn that your annuity provider is in financial trouble, don’t panic. Follow these steps.

• Verify the situation: If you receive a notice of receivership or liquidation from your insurance provider, confirm the status of your insurance company by contacting your state’s department of insurance or the NOLHGA.
• Contact your guaranty association: Reach out to your state’s guaranty association if you have questions about your specific situation. Here is a list of each state’s guaranty association, along with contact information.
• Keep good records: Make sure you have all relevant documentation for your annuity on hand, including account balances, payment schedules, premiums paid and contract terms.
• Consult a financial advisor: Seek advice from a financial advisor who can help you navigate the insolvency process — it’s complex. A fee-only financial advisor can also assess the impact on your retirement plan and help you explore alternative investment options.
• Be patient: The time it takes for a guaranty association to process and pay a claim varies, but payments typically start as soon as possible after an order of liquidation is issued. Sixty to 90 days can be common but be prepared for delays.

In most states, if your benefits exceed the guaranty association’s coverage limits — say you owned a $700,000 immediate fixed annuity and your state only covers up to $250,000 — the remaining amount turns into a claim against the insolvent insurer’s estate. When the company’s assets are sold off, you might get a slice of that back, however, it could take years.

Though unlikely, if the insolvent company’s estate doesn’t have any assets, the guaranty association coverage is the only payout you’ll receive, regardless of your account balance.

How often do insurance companies become insolvent?

Insurance company failures are uncommon. These companies must comply with strict reserve requirements and file regular audits with state insurance regulators.

Insurer insolvency rates have declined dramatically since the early 1990s, and in recent years, there’s only been one or two cases per year on average, according to the National Organization of Life and Health Insurance Guaranty Associations.

While rare, an annuity issuer failing can be a nightmare for policyholders.

In 2019, four insurance companies owned by now-convicted fraudster Greg Lindberg — Southland National Insurance Corp., Colorado Bankers Life Insurance Co., Bankers Life Insurance Co. and Southland National Reinsurance Corp. — were placed under state rehabilitation by the Superior Court of Wake County, North Carolina.

Roughly 70,000 holders of annuities totaling $2.2 billion were unable to withdraw their money for over four years as regulators worked to unwind the complex financial scheme and Lindberg delayed a liquidation through court appeals.

That proved problematic for victims because state guaranty associations don’t pay out until the company is in liquidation. Many who lost access to their money — either temporarily or forever — were retirees or risk-averse investors who bought annuities.

Annuity policyholders of Colorado Bankers and Bankers Life only began receiving partial payments in September 2023.

So while insurance company failures are less common now, for annuity owners even one failure can feel like too many if it’s their insurer that goes bust.

Bottom line

While the thought of your annuity provider going broke sounds alarming, the chances of it happening are low. If it does happen, protections are in place to safeguard your money. State guaranty associations provide an important safety net, ensuring annuity holders recover some or all of their funds.