An annuity guarantee is a promise from the insurance company that issued your contract, backed by that insurer’s ability to pay claims. It is not backed by the FDIC or any federal agency.
That makes the insurer you choose as important as the product. This lesson covers how to check an insurer’s strength, what your state’s safety net covers, and the three documents worth reading before you sign.
What backs an annuity guarantee?
When a contract promises to protect your principal or pay a set rate, the insurer is making that promise. It pays out of its own assets, held mostly in what is called its general account.
- Not a bank deposit. Annuities are not FDIC insured, even when a bank sells them.
- Not a federal promise. No government agency guarantees an annuity.
- Only as strong as the insurer. A guarantee from a weak company is a weaker guarantee.
The guarantee covers only what the contract says. A guaranteed minimum rate or protected principal is part of the promise. Projected returns and bonuses that have not vested are not.
Insurer failures are rare, but they do happen. When one fails, state regulators take over, and payments can be delayed or limited.
How do you check an insurer’s financial strength?
Before you hand over a large sum, check the insurer’s financial strength ratings. Three agencies rate most annuity insurers.
- AM Best. Specializes in rating insurance companies.
- S&P Global Ratings. Rates insurers on its own letter scale.
- Moody’s. Uses a different letter scale, so an “A” from one agency is not the same as an “A” from another.
Look at more than one rating if you can, and check the date. Ratings can change, so look them up yourself instead of relying on a sales brochure. Our coverage of life and annuity insurer capital strength explains what sits behind the grades.
A rating is a snapshot, not a guarantee. Keep its limits in mind.
- It measures the insurer, not the product. A top-rated company can still sell a contract that does not fit you.
- It can change after you buy. Your contract may last a decade, so the insurer’s strength matters for the whole term.
- It does not replace the state backstop. Use both checks together.
What does a state guaranty association cover?
Every state has a guaranty association that steps in if a licensed insurer fails. It is a backstop with limits, not a substitute for choosing a strong insurer.
Coverage is usually measured in annuity present value, per owner, per insurer. Limits vary by state, according to the NOLHGA state coverage table.
| Annuity coverage limit | States |
|---|---|
| $500,000 | Connecticut, New York, Utah, Washington |
| $410,000 | Minnesota |
| $300,000 | Arkansas, District of Columbia, North Carolina, Oklahoma, South Carolina, Wisconsin |
| $250,000 | Most other states, about 40 in all |
| 80% of value, up to $250,000 | California |
- Annuities already paying out. Florida, Georgia and New Jersey allow higher limits for these.
- Licensed in your state. Coverage applies only to insurers licensed where you live.
- Per insurer, not per contract. Two contracts with the same insurer share one limit.
- Large purchases. Splitting a big sum across more than one insurer can keep each contract within the limit.
Limits change over time, so confirm your own state’s figure before relying on it. Our guide to the state guaranty association covers how claims are handled. Your state insurance department can tell you which insurers are licensed where you live.
Which documents should you read before you buy?
Three documents describe what you are actually buying. Each does a different job.
| Document | What it is | What to look for |
|---|---|---|
| Contract | The binding legal agreement. You get it after purchase, but you can ask for a sample first. | The surrender schedule, guarantees and fees, in writing |
| Disclosure | A plain-language summary of features, fees and charges, required in most states | Any gap between the sales pitch and the product |
| Illustration | Hypothetical projections of how the product might perform | Which column is guaranteed and which is only projected |
An illustration is not a promise. Compare the guaranteed column to what you actually need, and treat the projected column as a best case.
Ask for all three before you sign, not after. If no one can show you a disclosure or a sample contract, treat that as a warning sign.
The most common annuity regret is not an insurer failing. It is a buyer who needed money before the surrender period ended and paid thousands in charges to reach it. Match the surrender period to your own time horizon, not to the product someone prefers to sell.
- What are this insurer’s current ratings from AM Best, S&P and Moody’s?
- Is the insurer licensed in my state?
- What is my state’s guaranty association limit, and does this purchase fit under it?
- Can I see a sample contract and the disclosure before I sign?
- On the illustration, which numbers are guaranteed and which are projected?
- Does the surrender period end before I might need this money?
Check your understanding
Answer five quick questions to check what you learned about annuity guarantees.
Lesson 3 quiz: What backs an annuity guarantee
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Common questions
Is an annuity guarantee the same as FDIC insurance?
No. FDIC insurance is a federal guarantee on bank deposits. An annuity guarantee comes from the insurer, with your state guaranty association as a limited backstop.
What happens to my annuity if the insurer fails?
State regulators take control of the company. If it cannot meet its promises, your state guaranty association covers you up to its limit.
Should I split a large annuity purchase between insurers?
It can make sense when the amount is above your state’s guaranty limit. Because the limit applies per insurer, two insurers can double the protected amount.
A strong insurer, a limit that covers your purchase and a surrender period that fits your plans are the three checks that matter most. Next, lesson 4 covers MYGAs, the simplest product, where the annuity guarantee is a fixed rate for a set number of years.