What Happens to an Annuity If an Insurance Company Fails?

Although it may sound alarming, it's rare for a life insurance company to become insolvent.

Published: 9/4/2025, 11:21:23 AM EDT

What Happens to an Annuity If an Insurance Company Fails? — (Fox_Ana/Shutterstock)

Most people see annuities as a haven for their money. The guarantee of a monthly income lends a feeling of security during retirement.

But what if the insurance company holding your annuity fails? What happens to your nest egg? Although not a common occurrence among life insurance companies, insurance insolvency can happen.

Is There a Federal Safety Net for Annuities?

The federal government provides $250,000 insurance through the Federal Deposit Insurance Corporation (FDIC) for banks. But, unfortunately, if the company holding your annuity goes insolvent, your principal or future payments aren’t guaranteed by the federal government.

Your annuity is also not insured by the Securities Investor Protection Corp (SIPC), which provides $500,000 to investors if their brokerage fails.

The federal government doesn’t control insurance. That is left to the individual states. States have guaranty associations that offer some protection to policyholders.

States Responsible for Insurance Companies

According to the U.S. Government Publishing Office concerning general provisions for bankruptcy, domestic insurance companies are explicitly excluded from federal bankruptcy laws.

Instead, insurance companies are regulated and therefore come under the control of state governments.

When an insurance company fails, states’ guaranty associations protect policyholders from significant financial losses. Guaranty associations are nonprofit organizations established by law. They consist of members, which are insurance companies.

According to the American Council of Life Insurers (ACLI), the states’ guaranty associations’ coverage for failed insurance companies is funded by post-insolvency assessments of the other guaranty association member companies. Assessments are based on each member’s share of premium during the three prior years.

Is There a Limit to the Amount Paid by Guaranty Association?

The coverage amount provided by each guaranty association to the policyholder is set by state statute and differs for each state. But according to ACLI, most states provide $250,000 in present value of annuity benefits, including cash surrender and withdrawal values.

Payment isn’t made to the policyholders until the bankrupt insurance company has been liquidated. This can take months and in some circumstances years.

Payees of structured settlement annuities are also entitled to $250,000 of coverage.

If you are due to receive lifetime payouts, the coverage would be based on present value. This is based on the value of the future income stream in today’s dollars. According to Annuity.org, the present value is affected by the interest rate used to discount future payments, the number and amount of payments, and the timing of the payments.

If your annuity is worth more than the guaranty association limits, you may receive money back after the insurer is liquidated.

Money in variable annuities is generally invested in mutual funds in your own account. But money covered by the insurer’s general account could be at risk. Variable annuities are considered securities and are federally regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), according to Annuity.org.

How to Choose a Financially Stable Insurer

In the United States, there are five credit-rating agencies that assess insurers’ financial strength: AM Best, Fitch, Moody’s, and S&P Global.

Each agency has different rating standards. The Credit Rating Agency Reform Act of 2006 regulates these agencies.

Credit-rating agencies don’t recommend any particular annuity product; they simply assess an insurance company’s financial stability.

Depending on the rating agency, the scores can run from the best, using As, to the worst, using Ds or Fs. For example, S&P Global’s best rating is AAA (extremely strong) and goes down to D (default) with plus and minus qualifiers.

If you have a question about the rating of an insurance company you’re considering, contact your state insurance commissioner’s office. Here is a list of the state insurance commissioners.

What to Do If Your Insurance Company Is Insolvent

You will be notified if your insurance company goes into receivership or is liquidated. Confirm this with your state’s department of insurance or the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA).

You’ll also want to reach out to your state’s guaranty association. Here’s a list of state guaranty associations.

You’ll want to have all your annuity records, including account balances, payment schedules, premiums paid, and contract terms.

It may be wise to consult a fee-only financial adviser to assist you through the complex insolvency process. There may be delays before you receive your money. So, you’ll need to be patient.

Is It Common for Insurance Companies to Go Bankrupt?

It is not common for life insurance companies to go bankrupt. Property and casualty companies are more likely to become insolvent due to catastrophic claims from natural disasters.

But in 2019, four insurance companies went bankrupt:

Southland National Insurance Corp
Colorado Bankers Life Insurance Co.
Bankers Life Insurance Co.
Southland National Reinsurance Corp

All were owned by now-convicted fraudster Greg Lindberg.

Chances Are Low Your Annuity Provider Will Go Bankrupt

It’s rare for a life insurance company to become insolvent. However, if you are considering an annuity, be sure to check the company’s rating.

Fortunately, you have a safety net. States have a guaranty association that will pay you at least $250,000 once the company is liquidated.

The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. NTD does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. NTD holds no liability for the accuracy or timeliness of the information provided.

From The Epoch Times