Is Your Fixed Annuity Safe?

If you’re counting on state insurance pools to protect your fixed annuity, think again — you may not have as much protection as you believe.

State insurance pools have been drawing consumer interest since the failure of AIG. But these pools don’t function like the FDIC, which guarantees bank accounts up to $250,000 per person. Here are three things you need to know:

Some states don’t have a guaranty. Check with your stateto find out if it guarantees annuities.

The state may not agree to pay the money. In some cases, regulators have frozen accounts at insurance companies that went under. Death benefits are still paid out, but redemptions of a policy’s cash value are frozen.

Many state pools are limited to $100,000. If your annuity is worth more than $100,000, you could be out of luck.

If you own an annuity, sit tight. You might pay a big penalty to liquidate your annuity. Also, it’s unlikely that your insurance company will go bankrupt — making it unnecessary to cash it in.

If you’re shopping for an annuity, beware of unscrupulous insurance agents and advisors who tout state insurance pools as a guarantee that you can’t lose money. Instead, consider a variable annuity that lets you invest in government bonds. Unlike a fixed annuity, variable annuity assets are segregated from the insurance company — meaning your money is not exposed even if the company goes broke. And by investing in government bonds, your funds are guaranteed by the government, giving you the best of both worlds.

Meanwhile, choose a fiscally-strong annuity carrier to reduce risk it will fold. And don’t expect the state to pick up the pieces.