What Happens if an Insurance Company Fails?

When people consider purchasing an annuity, they often question the safety of insurance companies and what happens if they fail. Though it is an extremely rare occurrence, it’s a legitimate concern. You want to know that your money is protected and will always be there.

The problem is that people don’t analyze annuities from every angle, thus resulting in a false representation of annuities and the institutions that provide them (insurance companies).

The truth is, as a retiree, insurance companies are almost always a better place to put your money than banks. Banks are more commercially represented, thus leading people to believe they are the safest and most reliable place to put your money. Because of this, banks are many people’s “go-to” option. You can read more about the difference between banks and insurance companies here.

However, many people don’t realize that this is actually a misrepresentation and banks aren’t always the safest place to put your money. This is especially true in retirement.

In the rare event of an insurance company failing, your investment may be guaranteed up to a maximum amount. Policyholders may be unharmed because another company, that has reinsurance from other groups of companies, may step in and buy that block of business.

It’s just an added layer of protection.

While banks do have a safety net in place, it may not be as foolproof as the safety net insurance companies have when it comes to helping protect your money. Banks serve their purpose, as do insurance companies.

However, in retirement, protection of your money is one of the most important things to consider, and insurance companies may accomplish that much better than banks.

In October, 2008, shortly after the market crash, and at a time when the nation was jittery over what financial tower would next collapse, Time magazine’s business and money section ran an article entitled “How Safe Is Your Insurance Company?” Here’s an excerpt:

“Unlike the banks that have collapsed or merged under pressure, insurance companies are tightly regulated, mostly by the states. The companies are required to keep vast sums of cash and short term investments to be able to pay off policies, and they are required to pay into state funds to protect policy holders in case one of the companies should ever fail.”

Let’s go back to my statement at the beginning of this blog when I said that people don’t analyze annuities from every angle. It’s a pretty bold statement to say that all annuities are terrible options for everyone. Insurance companies are the only entities through which you can buy an annuity, if that is any indication of the strength and safety of annuities.

Just like anything, it ultimately comes down to what’s best for YOU and what will help accomplish YOUR goals. In retirement, the #1 thing that matters most is protecting your hard-earned money and receiving a guaranteed cash flow for life. The way you go about reaching that goal is up to you.

 

Image courtesy of sscreations at FreeDigitalPhotos.net

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