How Safe Are Your Annuities? Evaluating Insurance Guarantees

3 June 2025

Annuities are often touted as a secure way to ensure a steady income stream in retirement. But how safe are they, really? If you're considering putting your hard-earned money into an annuity, it's important to understand exactly what you're getting into—especially when it comes to the insurance guarantees backing them.

Let’s break down the risks, the guarantees, and whether you should feel confident about your annuity investment.

What Is an Annuity?

Before diving into the safety of annuities, let’s cover the basics.

An annuity is a financial product sold by insurance companies that provides regular payouts, either immediately or in the future. They are commonly used for retirement planning, offering a way to receive a predictable income for a set period or even for life.

There are different types of annuities, such as:

- Fixed annuities – Offer a guaranteed interest rate and predictable payments.
- Variable annuities – Payments fluctuate based on the performance of investment funds.
- Indexed annuities – Returns are tied to a stock market index, but with certain protections.
- Immediate annuities – Begin paying out right after purchase.
- Deferred annuities – Payments begin at a later date, allowing your money to grow.

Each type has its own risks, which brings us to the million-dollar question—how safe is YOUR annuity?

Who Guarantees Your Annuity?

Annuities are backed not by the government, but by the issuing insurance company. This is key to understanding their safety. The guarantees aren’t ironclad like FDIC insurance on bank deposits. Instead, they rely on the financial strength of the insurer.

If the insurance company is financially stable, your annuity is relatively safe. However, if the company fails, that safety net may have some holes.

How Strong Are Insurance Company Guarantees?

Insurance companies that sell annuities promise to meet their obligations, but what happens if they run into financial trouble?

1. Financial Stability of the Insurer

Annuity safety depends largely on the insurance company’s financial health. Insurers are rated by independent agencies, including:

- A.M. Best
- Moody’s
- Standard & Poor’s (S&P)
- Fitch Ratings

These agencies assign letter grades (like school report cards) to indicate how financially secure an insurer is. Higher ratings (e.g., A+ or AAA) suggest the company is strong and less likely to fail. If your insurer has a lower rating, it might be time to reconsider placing your money with them.

2. State Guaranty Associations (Your Backup Plan)

Even if an insurance company goes under, you might still be covered—up to a point. Each state has a guaranty association that offers a safety net for annuity holders.

How much protection do you get?

Coverage limits vary by state, but typically:

- $250,000 per annuity contract is protected.
- The coverage applies per policyholder, per insurance company.

However, if your annuity balance exceeds the coverage limit, only part of your money is protected. This makes it crucial to:

✅ Choose a highly-rated insurer.
✅ Avoid putting too much annuity money into a single company.
✅ Check your state’s guaranty association limits.

The Risks of Annuities: What Could Go Wrong?

While annuities can provide financial security, they come with risks you should consider:

1. Insurance Company Insolvency

If an insurer goes bankrupt, your annuity payments could be at risk—especially if your balance exceeds state guaranty limits.

2. Low Returns on Fixed Annuities

Fixed annuities offer stability, but their returns often lag behind inflation. This means your money might not stretch as far in the future.

3. High Fees on Variable and Indexed Annuities

Some annuities come loaded with fees, including:

- Mortality and expense (M&E) charges
- Administrative fees
- Investment management fees
- Surrender charges if you withdraw funds early

These fees eat into your returns, making it harder to grow your wealth.

4. Liquidity Issues

Once your money is in an annuity, it’s not always easy to get it out. Many annuities have surrender periods (sometimes 7-10 years) where withdrawals come with hefty penalties.

Keeping Your Annuity Safe: Pro Tips

If you’re worried about annuity safety, here are some smart steps to protect yourself:

✅ Choose a Strong Insurer

Look for companies with high financial ratings (A or better).

✅ Diversify Your Annuities

Instead of putting all your annuity money into one company, spread it across multiple insurers to avoid losing too much if one fails.

✅ Understand Your State’s Guaranty Protection

Know your state’s coverage limits so you don’t put more money at risk than necessary.

✅ Read the Fine Print

Pay close attention to fees, surrender charges, and payout terms before signing an annuity contract.

✅ Consider Alternatives

Annuities aren’t the only way to secure retirement income. You might also explore dividend-paying stocks, bonds, or real estate investments.

Are Annuities Truly Safe? The Bottom Line

Annuities can be safe, but only if you choose the right ones and the right insurer. Their security hinges on the financial health of the issuing company and state guaranty protections.

If you're considering an annuity, take your time to research, check insurer ratings, and consult with a financial advisor to make sure your money is as safe as possible.

💡 Remember, an annuity is only as reliable as the company that issues it. Choose wisely!