Posted by Mike Smith :: April 3, 2009 @ 6:15 am

Annuities have always been a useful way for investors to guarantee themselves a fixed income in the future, but with some insurance companies on the brink of failure, that guarantee isn’t what it once was. To ensure that investors are aware of this risk, warnings about this type of loss are being more prominently displayed in advertisements.

There are many different types of annuities, but their basic function is to convert an up-front payment to the insurance company into periodic payments back to you. This type of investment can be useful for people who retire and want to guarantee a fixed amount of income for a certain number of years, or until they die. While the process seems to have less risk than other types of investments, the risk of the insurer defaulting seems more likely in today’s financial crisis.

I noted that this point was made clear in all of the annuity advertisements I’ve seen recently. They generally include a caveat like “”All guarantees are based on the claims-paying ability of the issuing company” or “Guaranteed lifetime income is subject to the claims paying ability of the issuing insurance company.” These points, while still generally made in the fine print, were either in bold or appeared in a larger typeface than other fine print.

If the issuer of your annuity were to default, state law governs the outcome. A government agency, the state Guaranty Association, protects annuity holders up to a certain dollar amount, which varies by state. Each annuity is evaluated separately, and will either be paid out, up to the applicable limit, or taken over by a different insurer. So if your issuer defaults, it may not be a total loss, but you could end up with less than you expected.

Before purchasing an annuity, it’s important to both consider the financial health of the issuing company and know the Guaranty Association protection limits for your state. People tend to use annuities for guaranteed income, but without taking these steps, that guarantee may be worth much less than you think.

Has your annuity issuer defaulted?