The Current Financial Crisis and Annuities

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By: Bill Broich

For years annuities have been marketed along with FDIC guaranteed bank accounts and US Treasuries as the safest place to keep important funds. This safety issue along with annuity's contractual benefits has made them a very popular vehicle. Now with the financial crisis appearing to spread into all aspects of our economy, the logical question is how safe are annuities?

The current financial mess was created because of inappropriate mortgages provided for non qualified applicants and runaway property values. The assumption was that real estate would continue to rise and equity would be gained in home ownership. Once the melt down started, many people with home that they could not afford (and never should have qualified for) simply went into default. Once default came the holders of the mortgages asked the sellers of the mortgages to provide relief with the promises insurance against loss. As things worsened, he funds and collateral were not sufficient to survive and the overall mortgage paper had to be written down (lowered in value). Once the devaluation of the paper happened, banks were left short of reserves because of having to provide additional collateral for the reduction in value of the mortgage paper.

A vicious cycle occurred, homeowners were evicted, the values of the homes declined, the value of the mortgage paper declined, the backs had to find collateral to cover reserves, the insurance companies who insured the loans were short on collateral and all this created the failure of banks and the investment bankers who created the whole scheme.

Insurance companies have come into the fray because many of them had purchase (provided the money) to make fund the mortgages. For the insurance company it seemed like a prudent move, insured mortgages. Insurance companies want a fair yield without exposure to loss and the mortgage being insured to them was an ideal offering. The problem was that the original mortgages were being written with almost no oversight and with a potential larger than expected default rate appearing, there just weren't enough assets to guarantee the loans. AIG is a fine company and their insurance and annuity divisions are the envy of the industry but their investment arm bought and sold these mortgages which created the whole collapse of the company and the eventual takeover by the US Government.

AIG and other insurance companies who sell and service annuities fall under the state guarantee fund of each individual state. If an annuity issued by AIG were to be questioned about it value and its security, the answer is "absolutely." All contracts issued by AIG (except variable) are fully insured to their states limits. In the real world for AIG, their insurance and annuity companies are well managed and have more than enough assets to maintain their commitment to their policy owners and it is extremely rare that any state guarantee fund would be called on the assist the company. This division of AIG will be purchased by another insurance company and business will continue just as before.

That site beauty of the annuity contract, guarantees and continuance is always guaranteed. Like the FDIC, the annuity contract is covered by insurance limits established by each state. These limits vary from $100,000 to $500,000 depending on the state of residence of the annuity owner.
Is there any reason for concern? I think that answer is yes...sort of. If the federal government does not get regulatory control over Wall Street and the way it creates products then the issue will continue to a concern. Management of insurance companies should be primarily left to each state department of insurance and never allowed to come under federal control. That is very obvious after this financial mess created by greed in the mortgage marketplace.

The current and future administrations have to get their act together and remember they are elected by the US taxpayer and they should make every effort to protect su and our futures on a greater level than a few Wall Street powers.