by James Copenhaver
 We’ve received calls from clients in the recent weeks concerned about the safety of their variable annuities, in part fueled by the stock-market turmoil and the government rescue of insurer American International Group Inc.
Regulators and consumer advocates say life-insurance companies rarely have failed and seldom do so suddenly. And in the rare instance a company becomes insolvent; states ensure that guaranty funds protect both cash values and death benefits up to certain limits.
And taking rash action is a potentially costly move: Cashing out of a variable annuity early can invoke surrender charges, generally as high as 10% for as long as 10 years. Those who cash out before age 59½ also face tax liabilities and penalties. And give up locked in benefit values.
Here are answers to some common questions investors may have about annuities:
Q: Should I be worried if the share price of my insurer declines?
A: Not necessarily. In some cases, analysts say, publicly traded insurance companies' stock prices have plunged partly because of their efforts to raise capital. And while raising capital can dilute existing shares, it also improves an insurer's ability to pay claims. Hence, a decline in the stock value of a company doesn't always spell immediate trouble for annuities or life-insurance policies.
Q: Should I worry if the financial-strength rating of my insurer declines?
A: Possibly. Financial-strength ratings, supplied by rating agencies, are an evaluation of the ability of a company to make good on its guarantees. A slip from an excellent financial-strength rating from one of the five agencies -- Fitch Inc., A.M. Best Co., Moody's Investors Service, Standard & Poor's or TheStreet.com -- to a slightly lower rating that is still in the secure range isn't cause for alarm, experts say.
In Case of Insolvency |
| Both fixed and variable annuities are protected by state guaranty funds: |
• Death benefits are often protected up to $300,000. |
• Cash values are often protected to a maximum of $100,000. |
| With a variable annuity, some insurer guarantees are protected, but losses due to market declines generally are not. |
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Through September 30, 6.5% of the life/annuity and health-insurance companies followed by rating agency A.M. Best had been downgraded, though most remained in the "secure" range, meaning they are still regarded as financially sound.
You can find information on financial strength of companies licensed in your state by linking to your state's insurance department, at www.naic.org, the Web site of the National Association of Insurance Commissioners.
Source: The Wall Street Journal
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