I have received many questions about the financial safety net in the wake of Tuesday's front page articles on the market woes, struggles of financial institutions,and possibility of bank and insurance company failures.
I will post responses to all those questions below.
However, let me make a few things clear:
1. There is a link directly to the FDIC rules on the home page at www.TerrySavage.com (right column, halfway down the page).
2. INSURANCE contracts, such as annuities, are not covered by Federal insurance. They are covered by "state guarantee funds" that are basically a "call" on other insurance companies doing busiiness in the state.
Many of you own AIG annuity contracts through companies like VALIC. My answer is
"I believe that even if AIG files for bankruptcy, these profitable subsidiaries like Valic will be sold to other, stronger insurance companies -- and tht your annuity contracts will remain safe." That is my firm belief -- though there is no guarantee!
I would not try to "break' these contracts, possibly incur penalties or taxes now. It would take a while to roll over any contract --and then you'd be caught up in the paperwork of a transfer --just when another insurer is likely trying to buy the entire portfolio.
I'll update this thought as news breaks!
Terry Savage writes a syndicated personal finance column for the 
What will happen to AIG variable annuity if the person die?
Does AIG pay the rmainig balance to the beneficiary?
Can you break the contract?
SAVAGE SAYS: If there is wording in the contract to the effect that the beneficiary receives a balance (either the surrender value, or the surrender value less any withdrawals) then the named beneficiary would receive that amount. But check the wording carefully, because each variable annuity may have a different approach to the amount given to the beneficiary -- and that may also depend on whether the contract has had withdrawals taken out, or been "annuitized" into a lifetime monthly check with a beneficiary to receive a certain balance or continuance of payments.
Can you "break" the contract? If you haven't annuitized you may break an annuity contract -- subject to penalties and surrender charges. But you might be better off doing an "exchange' into another qualified annuity, even offered by another company, as there will be taxes on any increase in value unless you exchange to a like contract.
Hi .. any update on the safety of VALIC? I'm a retired teacher with a VALIC annuity. I'm fully funded, could rollover into another company without any penalities. I'm concerned because all I hear is how poorly AIG is doing, bailout after bailout from the fed. Any suggestions?
Thanks!
SAVAGE SAYS: I understand your anxiety -- and you can do the roll if you want, but you'll probably start new surrender charges. The government realizes that millions of retirees have these same contracts. That's why they won't let AIG fail! That's why all the money is being put into AIG. And if AIG by some long shot were to fail, other insurers would face the same consequences. For those asking why we're "bailing out" AIG, that's the answer!
How does one check out the financial health of an Insurance Provider. I am 75 years old and have the majority of my savings in 2 fixed annuities with the same Organization. Thanks
Savage Says: Go to www.weissratings.com -- They've been publising independent insurance company ratings since 1989. Or call them at 800-289-9222. Weiss is now owned by theStreet.com.
After Terry Savage encouraged "Reversed Mortgages her credibility has gone downhill with me.
SAVAGE SAYS: Gosh, I can't imagine why. A Reverse Mortage lets seniors with fully paid homes (or only a small mortgage balance remaining) stay in their homes, continue to own their home, and receive a lump sum, or a monthly check. It's like turning your home into a pension. In fact, I think it's such a good idea I organized one for my own father!
Go to www.ReverseMortgage.org, or www.GoldenGateway.com to learn more about how they work, see how much you could get based on your age, and the value of your home.
Sure, there's interest on the amount withdrawan -- but the RM doesnt have to be repaid until the house is sold, or the owner dies. And you can never be forced out of your house because you've withdrawn too much. And you can never owe more than the house is worth. And if you owe less when you sell, or die, then you or your heirs get the balance. I think RM's are a GREAT idea under the right circumstances for seniors who are able and want to stay in their home for years.
THAT'S WHY AIG HAD TO BE BAILED OUT, ALOT OF
HEALTH CARE PROFESSIONALS AND TEACHERS WOULD HAVE
LOST A CONSIDERABLE AMOUNT OF RETIREMENT MONEY
WITH VALIC, ONE OF AIG'S COMPANIES!
Terry,
In Tuesday's SunTimes you said, "In previous insurance company failures, contract holders did lose money on fixed-rate annuities, which are considered assets of the insurer." According to the Illinois Department of Insurance, fixed-rate annuities are subject to the state guaratee fund up to $100,000. per tax I.D. number.
SAVAGE SAYS: And did you ask the Department of Insurance where its fund is right now -- that fund that protects insurance company customers? As I noted, the state can "call" on other insurers to contribute to the fund. But it does not presently exist. Nor does the state itself have a guarantee fund.
In the past, when insurance companies went broke in California, Executive Life, many contract holders did not receive the entire $100,000 guaranteed amount, much less amounts in excess of that amount.
I'm not trying to start a crisis here, just to answer your question honestly. In the case of large insurers -- like the current crisis with AIG -- it's quite likely that their insurance division would be sold to another solvent company, and all contracts would be honored. But there is no guarantee of that!
Hi. I wrote you some time back about my Valic 403B account. AIG doesn't look so good now. What will happen if they default? I have my pension money in there. Will it be insured through FDIC? I tried to contact them but no one replies. This is scary for alot of retirees like me.
SAVAGE SAYS: Right now the financial powers are trying to work out something with AIG. I'm reasonably sure that any private or public "rescue" plan will include guaranteeing all those annuity contracts. That subsidiary of the company is very profitable and will probably be purchased by another insurance company with contracts remaining intact.