A few issues ago, I wrote about a quartet of failed banks and annuity carriers where, when all was said and done, every one of the annuity and bank customers was fully covered and didn’t lose a penny, regardless of account balances. Let’s take a closer look at the safety net behind bank accounts and fixed annuities.
Since the founding of FDIC insurance in January 1934, no depositor has lost a dime of insured funds as a result of a bank failure.
State Guaranty Funds were set up by the individual states to protect policyowners in the event of an insurer failure. In 1983, the state guaranty associations founded the National Organization of Life and Health Insurance Guaranty Associations.
So what are the limits of this coverage? FDIC covers up to $100,000 in deposits for one owner at one insured bank of nonqualified funds, and up to $250,000 in bank IRAs, and there are different categories of owners that may allow one to increase coverage.
All states (plus Puerto Rico) provide $100,000 in withdrawal and cash values for all fixed annuities through their guarantee funds. Seven states (and one district) have higher limits of up to $300,000.
The Deposit Insurance Fund assesses banks based on their risk; the riskier the bank, the higher the assessment. Assessments range from 0 percent to 0.27 percent.
Guaranty fund assessment levels are set by the states. The vast majority of the states may assess the insurer up to 2 percent of the premiums paid within that state for the guaranty fund. Five states (Alabama, California, Colorado, Florida and Texas) have a maximum annual assessment of 1 percent, Rhode Island has a maximum assessment of 3 percent and South Carolina’s maximum is 4 percent.
The FDIC had nearly $50 billion on hand during the spring of 2006 to cover $4 trillion of deposits, so the FDIC account represents 1.24 percent of deposits.
How much cash do NOHLGA and the collective state guaranty funds have stashed away? The answer is zero. In response to my specific question, a director of NOHLGA wrote back, “It’s important to remember that unlike the FDIC, the guaranty system is not pre-funded. Instead, member companies are assessed by the associations only when funds are needed.”
The real question is not whether banks are safer than annuities. It is this: “Are fixed annuities also safe?”
The states require that an insurance company must keep enough money to cover the current and future obligations of the policies issued, plus a little bit extra. This money is referred to as policy reserves, statutory reserves or legal reserves. Because of these reserves, and the general fiscal conservativeness of insurers, fewer than 1 percent of all annuity carriers have gone into receivership in the last 12 years and every fixed annuity owner covered by a guaranty fund has been made whole up to the limits of the guaranty fund. A fixed annuity should be presented as simply another safe money place.