FAQs: Product Coverage

Generally speaking, there are two types of individual fixed annuities:

1. A fixed income annuity (which is sometimes referred to as a payout annuity) is a contract between an individual and an insurance company that provides for the insurer to make fixed periodic payments to the payee listed in the contract (“Income Annuity Contract”). The contract may provide for those payments to begin immediately or several years into the future. The payments may be paid for a fixed period and/or a contingent period based on the life of an annuitant listed in the contract.

2. A fixed deferred annuity is an asset accumulation product that generally grows tax deferred until the owner elects to begin periodic payments (“Deferred Annuity Contract”). Prior to the commencement of the periodic payments (i.e., during the accumulation phase), the insurer will credit fixed interest amounts to the account value of the contract on a periodic basis.

If the insurer that issued an individual fixed annuity becomes insolvent, the guaranty association of the state in which the contract owner resides will provide coverage for the annuity, subject to certain statutory exclusions and limits. In most states, the coverage level for a fixed annuity is $250,000 in present value of annuity benefits, including net cash surrender/net withdrawal values. In addition, most states adjust the amount of interest eligible for coverage if the interest exceeds maximum rates specified in the guaranty association act. In order to determine whether a particular annuity is fully or partially covered, the guaranty association will compare (i) the present value of remaining annuity benefits under the contract as of the date the guaranty association becomes obligated to provide coverage, to (ii) the guaranty association’s coverage benefit level (e.g., $250,000). If the present value of remaining annuity benefits is less than or equal to the guaranty association’s coverage level, the annuity will be fully covered. If the present value of remaining annuity benefits exceeds the guaranty association coverage level, the annuity will be partially covered based on a ratio of the coverage level (e.g., $250,000) divided by the present value of annuity benefits. As an example, if an annuity contract has a present value of $300,000, then the guaranty association would cover 83.3% ($250,000/$300,000) of the annuity benefits under the contract. A contract owner with annuity benefits in excess of guaranty association levels may submit a claim for the benefits in excess of the guaranty association coverage against the estate of the failed insurer, which may contain substantial assets even after the company fails (see General Info, Question 14).

Generally, an “indexed annuity” is a type of fixed annuity where the insurance company credits interest or value to the contract based on the performance of an index or other external reference, such as the S&P 500 Stock Index. In addition, indexed annuities typically provide that the contract value will be no less than a specified minimum, regardless of index performance.

Yes, but most guaranty association laws have special provisions that govern coverage of indexed annuities. These provisions: (1) exclude from coverage most indexed-linked interest or value that has not been credited to, or which is subject to forfeiture under the contract; and (2) permit the guaranty association to provide coverage through an alternative form of annuity that provides for a fixed or other means of calculating interest in lieu of the index mechanism in the original contract. In addition, most states adjust the amount of index-linked value or interest eligible for coverage if it exceeds maximum rates specified in the guaranty association act. The coverage of indexed annuities with respect to who is covered (i.e., the owner) and the maximum benefit levels (i.e., up to $250,000 in present value of annuity benefits) is otherwise consistent with individual fixed annuities.

A “structured settlement annuity” is a type of fixed annuity purchased to fund periodic payments for a plaintiff in a court action or other claimant in payment for or with respect to personal injury suffered by the plaintiff or other claimant.

Unlike other fixed annuities, coverage for structured settlement annuities is provided to each payee listed in the contract (or the beneficiary listed in the contract if the payee is deceased). However, in states that have adopted Model Act Sections 3(A)(5)(c) and 3(B)(2)(n), guaranty associations do NOT provide coverage for (A) persons who acquire the rights to payments from a structured settlement annuity through a factoring transaction (as defined in 26 U.S.C. 5891(c)(3)(A)) and (B) benefits to which a payee (or beneficiary) has transferred his rights in a factoring transaction (as defined in 26 U.S.C. 5891(c)(3)(A)).rnrnMost guaranty associations provide coverage for structured settlement annuities in the amount provided for in the NAIC Model Act (i.e., with respect to each payee or beneficiary, up to $250,000 in present value of annuity benefits). Under the NAIC Model Act, coverage for a structured settlement annuity is typically provided by the guaranty association in the state of residence of the payee.

There are two types of variable insurance products: (i) variable annuity contracts and (ii) variable life insurance policies. These products are referred to as variable because the cash withdrawal and benefit values may fluctuate up or down based on the investment performance of a separate account, which is a fund held by a life insurance company that is maintained separately from the insurer’s general assets. Many variable products include riders in which the insurer’s general account guarantees certain values or benefits under the contract.

Variable insurance products are eligible for guaranty association coverage, subject to certain exclusions and limitations, including that guaranty associations do not cover portions of contracts that are not guaranteed by the insurer or under which the contract holder bears the risk. The coverage of variable annuities with respect to who is entitled to coverage (owner) and maximum benefit levels (up to $250,000 in present value of annuity benefits) is consistent with individual fixed annuities. Similarly, the coverage of variable life insurance with respect to who is entitled to coverage (owner or beneficiary) and maximum benefit levels (up to $300,000 in death benefits and $100,000 in cash surrender or withdrawal values) is consistent with individual fixed life insurance. The existence of a separate account with respect to a variable product does not impact the product’s eligibility for coverage.

The NAIC has adopted the following definition: “a contingent deferred annuity is an annuity contract that establishes a life insurer’s obligation to make periodic payments for the annuitant’s lifetime at the time designated investments, which are not owned or held by the insurer, are depleted to a contractually defined amount due to contractually permitted withdrawals, market performance, fees and/or other charges.”

Assuming contingent deferred annuities (“CDAs”) are considered annuities for insurance regulatory purposes, such contracts would be eligible for coverage as annuity contracts under the NAIC Model Act. The coverage of CDAs with respect to who is entitled to coverage (owner) and maximum benefit levels (up to $250,000 in present value of annuity benefits) is consistent with individual fixed annuities.

A joint annuity is an individual annuity contract or a certificate under a group annuity contract which has: (a) a single annuity owner with multiple annuitants, (b) multiple annuity owners with a single annuitant, or (c) multiple annuity owners with multiple annuitants.

The NAIC Model Act covers annuities in an amount up to $250,000 in present value of annuity benefits with respect to “one life,” regardless of the number of policies or contracts. In determining the life (or lives) used to apply the coverage level, there are differences between “Deferred Annuity Contracts” and “Income Annuity Contracts” (see Question 1(a), above, for an explanation of these terms). In the case of a Deferred Annuity Contract, there is one coverage level even for contracts with multiple annuitants and/or multiple owners. However, if the contract is an Income Annuity Contract, and there are multiple annuitants, then multiple coverage levels will be applied based on the life of each annuitant. On the other hand, jointly “owned” annuities (regardless of whether the contract is a Deferred Annuity or an Income Annuity) are always treated as having a single owner (i.e., the owners are treated as a single unit). Therefore, the existence of multiple owners does not impact the amount of coverage provided.

A group annuity contract consists of an annuity entered into by an owner for the benefit of a designated group, such as pension plan participants.

Guaranty associations cover group annuity contracts that are allocated (i.e., the insurer guarantees annuity benefits to individuals under the contract or under certificates issued pursuant to the contract). In most states, guaranty associations provide coverage to each group annuity certificate holder of up to $250,000 in present value of annuity benefits, including net cash surrender and withdrawal values.

Under the NAIC Model Act, an unallocated annuity contract is “an annuity contract or group annuity certificate that is not issued to and owned by an individual, except to the extent of any annuity benefits guaranteed to an individual by an insurer under the contract or certificate.” (See NAIC Model Act 5(X)). Unallocated annuity contracts typically are contracts purchased by sophisticated institutional investors, such as retirement plans that use such contracts as funding vehicles for participants.

Given the institutional nature of unallocated annuities, not all states provide coverage for such contracts. Under the NAIC Model Act (and the laws of many states that do cover unallocated annuities), coverage runs to the contract owner and is limited to $5 million in benefits per plan sponsor, regardless of the number of plans or contracts involved. In the case of governmental retirement plans established under Section 401, 403(b), or 457 of the U.S. Internal Revenue Code, the NAIC Model Act and some states provide a coverage level of $250,000 in present value of annuity benefits, in the aggregate, with respect to each plan participant. Coverage is typically provided by the guaranty association in the state where the plan sponsor has its principal place of business. States covering unallocated annuity contracts typically exclude from coverage (1) portions of such contracts that are not issued to or in connection with a specific employee, union, or association of natural persons benefit plan or a government lottery; and (2) unallocated annuity contracts issued to or in connection with benefit plans that are protected under the federal Pension Benefit Guaranty Corporation Act.