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I have my money in a fixed annuity with New York Life. I called the company and they say it is safe, but I’m worried. Should I be?
Bob Bergman, Tamarac.
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I retired more than 20 years ago. I have five fixed annuities from Allianz. From what I was told, if the market was bad I probably will not make money, but would not lose my initial capital. I hope they are fairly safe.
-Morton Schwartz

Before considering whether annuities are a “safe” investments, it’s important to understand a little bit about them. An annuity is a contract you buy from an insurance company that promises to make payments to you either immediately or at some time in the future. Usually, people buy them to save for retirement or just as they retire, to ensure that they have regular income.

When you buy an annuity, the financial strength of your insurance company is important. Equally important is the strength of state insurance regulation. Regulatory agencies monitor insurers’ financial health and they will act if a company’s position deteriorates. They step in, demanding the companies shore up their financial position.

If regulation and monitoring don't keep the company strong, there’s a backstop.

In Florida and in all the states, there is a guaranty association. Any insurer who does business in the state must be part of it. If one insurance company fails, the others must pick up the coverage and continue it, up to certain limits.

This does not happen often, but it does happen. You can protect yourself if you know how this works.

First, let’s deal with life insurance and the guaranty association. If your policy is not an annuity but is pure life insurance, then the death benefit is protected up to a $300,000 limit per insured life in Florida. The cash value of life insurance is protected up to $100,000. Those are the Florida guaranty limits for policies issued by companies regulated by the state of Florida and for those policyholders who were Florida residents at the time the insurance company is declared to be insolvent or liquidated.

The limits are per person and per company.

Now, to the question of annuities.

If it is a fixed annuity, the Florida limit is up to $100,000 in cash value for a deferred annuity that is not currently making payments to the policy holder. If the policy is making payments, then up to $300,000 is covered.

If it is a variable annuity, the same limits apply, but you may not be covered for losses caused by a decline in the value of your investments.

The rules depend upon whether your insurance company guarantees your principal. If it does, then the guaranty association covers it. If the principal is not guaranteed, then that would not be covered by the guaranty association, according to William Falck, executive director and general counsel of the Florida Life & Health Insurance Guaranty Association.

If you have an equity indexed annuity, a portion of your interest might also be guaranteed and therefore both principal and that part of the interest would be backed by the guaranty association.

"A good way to remember it is if it's guaranteed by the company, it's likely guaranteed by us," Falck said.

Because the $100,000/$300,000 limits on annuities are also per life and per company, that means, if you had a $100,000 annuity at one company and $100,000 at another, you’d be covered for both policies.

If an insurer gets into serious trouble, the guaranty association liquidates the assets of defunct insurance companies over the years, to get its money back.

State law governs who gets any funds that are recovered. Policyholders have first priority.

And the guaranty funds have in the past reimbursed some policyholders above the guarantee limits, but you shouldn’t count on that happening again.

These can be large, long-winded efforts, too. A huge insurer, Executive Life, became insolvent in 1991 and Falck said the Florida guarantee association expects to be handling payments to policyholders through 2060.

There are two main lessons in all this:

Know that some variable annuities can put you at risk.

And, the best way to stay safe is to stay below the limits.

If you need more insurance than that, buy more than one policy, from different companies, to avoid getting entangled in an insurer’s troubles.

For more information, take a look at www.nolhga.com.